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Economy in Brief

Philadelphia Fed Business Activity Index Declines Sharply
by Tom Moeller  May 19, 2011

The Philadelphia Federal Reserve Bank's index of regional factory sector activity dropped sharply in May to 3.9 from an unrevised 18.5 in April. It was the lowest since October and was well short of Consensus expectations for 20.0. During the last ten years, there has been a 76% correlation between the level of the Philadelphia Fed Business Conditions Index and the three-month growth in factory sector industrial production. There has been a 78% correlation with q/q growth in real GDP.

Month-to-month deterioration was broad-based amongst the component series. Orders fell sharply to its lowest since October. Several series turned negative including unfilled orders, inventories and delivery times, indicating faster delivery speeds. The employment figure rose m/m and made up declines during the prior two months. During the last ten years, there has been an 86% correlation between the index level and the monthly change in manufacturing sector payrolls.

The prices paid index fell to its lowest level since December. Fifty-six percent of firms paid higher prices while 8% paid less. During the last ten years there has been a 72% correlation between the prices paid index and the three-month growth in the intermediate goods PPI.

The separate index of expected business conditions in six months also fell sharply to its lowest since January, 2009 as expectations for new orders, shipments, unfilled orders and delivery times cratered. Expectations for prices fell to its lowest since October.

The survey panel consists of 150 manufacturing companies in Federal Reserve District III (consisting of southeastern PA, southern NJ and Delaware.) The diffusion indexes represent the percentage of respondents indicating an increase minus the percentage indicating a decrease in activity. The figures from the Philadelphia Federal Reserve can be found in Haver's SURVEYS database. The Consensus expectations figure is available in AS1REPNA.

Philadelphia Fed (%) May Apr Mar Apr '10 2010 2009 2008
General Activity Index 3.9 18.5 43.4 21.2 12.1 -7.7 -21.5
  New Orders 5.4 18.8 40.3 6.5 5.4 -9.8 -14.9
  Shipments 6.5 29.1 34.9 14.1 8.2 -8.1 -9.2
  Unfilled Orders -7.8 12.9 14.9 -1.5 -3.0 -15.3 -17.6
  Delivery Times -2.3 11.2 8.5 -0.8 0.9 -15.3 -10.6
  Inventories -5.4 1.7 12.0 -6.6 -5.1 -24.1 -16.7
  Number of Employees 22.1 12.3 18.2 3.4 4.6 -24.0 -8.8
  Prices Paid 48.3 57.1 63.8 34.0 28.5 -4.0 36.1
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