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Economy in Brief

Philadelphia Fed Business Conditions Index Deteriorates; Pricing Weakens Sharply
by Tom Moeller  January 15, 2015

The Philadelphia Federal Reserve Bank reported that its General Factory Sector Business Conditions Index for January fell sharply to 6.3 from 24.3 in December. The figure was the lowest since February and fell well below expectations for 20.0 in the Action Economics Forecast Survey. The seasonally adjusted figure, constructed by Haver Analytics, declined to 47.8, the lowest level since May 2013. It represented the first decline in activity since last April and 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.

Weakness was apparent in each of the component series. The shipments and unfilled orders components fell the most. The delivery times series also fell sharply and showed the quickest delivery speeds since April. The sharp decline in the employment component indicated a falloff in hiring for the first month since June 2013. 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. Also weakening m/m were new orders and inventories.

Pricing power eased sharply to its weakest level since April 2013. A lessened 20 percent of respondents paid higher prices but a much higher 11 percent paid less. 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 moved sideways at the lowest level since April. The expected shipments, new orders and employment series have been weakening.

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) Jan Dec Nov Jan'14 2014 2013 2012
ISM-Adjusted General Business Conditions 47.8 53.9 58.7 49.2 53.7 50.0 47.8
General Factory Sector Business Conditions 6.3 24.3 40.2 10.0 18.6 6.4 -0.2
  New Orders 8.5 13.6 32.4 6.7 15.0 7.2 -0.1
  Shipments -6.9 15.1 29.6 11.1 16.4 7.1 -1.3
  Unfilled Orders -8.6 2.7 7.8 -3.1 3.3 -3.8 -6.5
  Delivery Time -11.0 -0.2 5.8 -3.7 0.7 -4.0 -9.1
  Inventories -0.7 7.3 6.5 -14.3 1.8 -3.4 -6.0
  Number of Employees -2.0 8.4 20.3 9.1 10.6 1.5 0.1
  Prices Paid 9.8 14.4 15.8 18.8 21.7 16.6 17.7
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