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Economy in Brief

Philadelphia Fed Business Conditions Index Indicates Moderating Growth
by Tom Moeller  December 18, 2014

The Philadelphia Federal Reserve Bank reported that its General Factory Sector Business Conditions Index for December declined to 24.5 and reversed most of its improvement to 40.8 during November. The figure, nevertheless, continued to show improvement versus last year. It just missed expectations for 27.0 in the Action Economics Forecast Survey. The seasonally adjusted figure, constructed by Haver Analytics, fell to 54.2, the lowest level in six months. It is comparable to the ISM Composite index. During the last ten years, there has been a 71% correlation between the adjusted Philadelphia Fed index and real GDP growth.

Deterioration in the component series was broad-based last month. The new orders series fell to its lowest level in three months and shipments were off to the lowest level in six. The employment figure fell to its lowest level since April. During the last ten years there has been a 79% correlation between the employment index level and the m/m change in factory sector employment. The unfilled orders and delivery time series also fell sharply, the latter indicating the quickest delivery speeds since May. The inventory series was roughly stable, just off the October high. The average workweek series was roughly unchaged m/m as well, but down from the August high.

Pricing power continued to weaken sharply, to its lowest level since April. A lessened 23% of respondents paid higher prices, down from 36% six months ago. Nine percent paid less versus 1 percent six months ago. During the last ten years, there has been a 71% correlation between the prices paid index and three-month growth in the intermediate goods PPI.

The separate index of expected business conditions in twelve months retraced its November improvement with a fall to the lowest level since May. Declines were led by new orders, shipments, employment, delivery times and prices paid.

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 ISM adjusted figure, calculated by Haver Analytics, is the average of five diffusion indexes, new orders, production, employment, supplier deliveries and inventories with equal weights (20% each). Each diffusion index is the sum of the percent responding "higher" and one-half of the percent responding "same."

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 (%, SA) Dec Nov Oct Dec'13 2014 2013 2012
ISM-Adjusted General Business Conditions 54.2 59.5 55.6 53.1 53.7 50.0 47.8
General Factory Sector Business Conditions 24.5 40.8 20.7 6.4 18.5 6.4 -0.2
  New Orders 15.7 35.7 17.3 12.9 15.1 7.3 -0.1
  Shipments 16.1 31.9 16.6 11.9 16.4 7.1 -1.3
  Unfilled Orders 1.5 7.1 11.6 -6.6 3.4 -3.8 -6.5
  Delivery Time -1.2 5.8 0.6 -8.0 0.7 -4.0 -9.1
  Inventories 10.4 10.0 14.8 16.0 1.9 -3.2 -6.0
  Number of Employees 7.2 22.4 12.1 4.4 10.6 1.5 0.1
  Prices Paid 14.0 17.3 27.6 16.4 21.8 16.7 17.7
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