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Economy in Brief

Philadelphia Fed Factory Conditions & Prices Soften
by Tom Moeller  August 16, 2018

The Philadelphia Federal Reserve reported that its General Factory Sector Business Conditions Index declined sharply to 11.9 during August following a July increase to 25.7. It was the weakest reading since November 2016. The decline compared to expectations for a lesser decline to 22.0 in the Action Economics Forecast Survey. The figures are diffusion indexes where readings above zero indicate expansion. The percentage of firms reporting an improvement in business activity fell sharply to 31.5%. The number reporting a worsening increased slightly to 19.7%.

Haver Analytics constructs an ISM-Adjusted General Business Conditions Index. The figure weakened notably this month to 55.6 from 58.6, the lowest level since July of last year. During the last ten years, there has been a 66% correlation between the quarterly ISM-adjusted Philadelphia Fed Index and quarterly real GDP growth.

Declines in the component readings spread throughout the survey. The new orders reading declined to the lowest level since January and the shipments figure fell sharply as well. The unfilled orders series fell moderately and the delivery time reading declined, indicating the fastest product delivery speeds in six months. To the upside, the inventories index jumped to the highest level since March.

The labor market indicators softened this month. The employment index declined to the lowest level reading since September of last year. During the last ten years, there has been an 81% correlation between the index level and the month-to-month change in manufacturing employment. The share of firms reporting a rising level of payrolls collapsed to 18%, one-half of the cycle high and the lowest point in twelve months. A modestly lower four percent reported a decrease in payrolls. The average workweek series eased to the lowest point since July of last year, down sharply from the expansion high just three months ago.

The prices paid index eased after strengthening in July to the highest level of the economic expansion. The percent of respondents reporting higher prices paid rose to 63.1, while a higher eight percent paid less. The index of prices received backed away from the 29-year high.

The future activity index improved modestly following its sharp weakening during the prior month, leaving it below the expansion high reached in March 2017. Most of the component series improved modestly including new orders, shipments and employment. The prices paid series held steady, but expected prices received rose to a thirty-year high.

The survey panel consists of 150 manufacturing companies in the third Federal Reserve District (which consists 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, shipments, employment, delivery times and inventories with equal weights (20% each). Each ISM-adjusted index is the sum of the percent responding "higher" and one-half of the percent responding "same."

The figures from the Philadelphia Federal Reserve dating back to 1968 can be found in Haver's SURVEYS database. The expectation from the Action Economics Forecast Survey is available in AS1REPNA.

Philadelphia Fed - Manufacturing Business Outlook Survey (%, SA) Aug Jul Jun Aug'17 2017 2016 2015
General Factory Sector Business Conditions 11.9 25.7 19.9 22.1 27.4 4.9 3.7
ISM-Adjusted Business Conditions 55.6 58.6 58.9 56.0 57.2 48.3 49.4
  New Orders 9.9 31.4 17.9 20.7 25.4 4.9 3.0
  Shipments 16.6 24.7 28.7 28.8 26.8 6.9 3.0
  Unfilled Orders 5.6 11.0 -2.7 11.9 11.9 -5.6 -5.1
  Delivery Time 6.4 11.0 9.6 10.8 10.6 -4.6 -4.2
  Inventories 15.4 14.4 10.2 -3.3 2.8 -9.6 -1.4
  Number of Employees 14.3 16.8 30.4 12.1 16.2 -5.6 3.9
  Average Workweek 10.7 13.7 24.2 18.2 14.9 -5.4 -1.7
  Prices Paid 55.0 62.9 51.8 21.9 30.4 13.5 1.5
Expectations - General Business Conditions; Six Months Ahead 38.8 29.0 34.8 44.0 47.1 33.7 37.6
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