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Economy in Brief

Philadelphia Fed Manufacturing Index Weakens Considerably
by Tom Moeller  June 20, 2019

The Federal Reserve Bank of Philadelphia reported that its General Factory Sector Business Conditions Index declined to 0.3 in June after May's improvement to 16.6. It was the lowest index level since February. A reading of 11.5 had been expected in the Action Economics Forecast Survey. These figures are diffusion indexes where readings above zero indicate expansion. The percentage of firms reporting an improvement in business activity rose to 31% in June from 25% in May. The percentage reporting weaker conditions jumped, however, to 31% from nine percent.

Haver Analytics constructs an ISM-Adjusted General Business Conditions Index. It improved to 55.0 this month, the highest level in six months. Nevertheless, the index remained sharply below its expansion high of 61.1 reached in May of 2018. Over the past twenty years, there has been a 61% correlation between the ISM-adjusted Philadelphia Fed Index and q/q real GDP growth.

Performance amongst the sampled series was mixed in June. A sharp decline in the new orders series was accompanied by a lower shipments reading. The unfilled orders, inventories and delivery times indexes improved, the latter indicating the slowest product delivery speeds since Many 2018.

The employment index also declined moderately. A lessened 25% of respondents reported an increased level of hiring while a higher nine percent reported fewer jobs. During the last twenty years, there has been a 77% correlation between the jobs index and the m/m change in factory sector employment. The average workweek reading declined to the lowest level since February and remained well below the expansion high reached in May of last year.

The index of prices paid fell sharply to the lowest level since October 2016 and was sharply below the high reached last July. A lessened  of respondents reported paying higher prices while an increased 15% reported lower prices paid. The index of prices received cratered to 0.6 from 17.5 and was the lowest level since October 2016.

The Philadelphia Fed also constructs indexes of future activity. The General Business Conditions series improved slightly m/m but remained sharply below the high reached in March 2017. The future new and unfilled orders indexes gained along with shipments and inventories. The employment index was steady but improved versus its April low. The prices paid and received indexes weakened.

The survey panel consists of 150 manufacturing companies in the third Federal Reserve District (which consists of southeastern Pennsylvania, southern New Jersey 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 "no change."

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) Jun May Apr Jun'18 2018 2017 2016
General Factory Sector Business Conditions 0.3 16.6 8.5 20.8 21.1 27.3 4.9
ISM-Adjusted Business Conditions 55.0 54.6 54.1 59.0 57.7 57.3 48.2
  New Orders 8.3 11.0 15.7 21.2 21.0 25.3 5.0
  Shipments 16.6 27.6 18.4 27.2 22.8 26.8 6.9
  Unfilled Orders 10.2 1.9 0.4 -0.2 7.1 11.9 -5.6
  Delivery Time 15.6 3.4 -5.1 9.5 9.5 10.6 -4.6
  Inventories 2.4 -3.1 2.6 9.5 7.4 2.9 -9.6
  Number of Employees 15.4 18.2 14.7 28.3 21.6 16.1 -5.6
  Average Workweek 7.3 10.9 11.2 21.8 15.9 14.9 -5.4
  Prices Paid 12.9 23.1 21.6 50.7 46.4 30.4 13.5
Expectations - General Business Conditions; Six Months Ahead 21.4 19.7 19.1 35.3 36.9 47.1 33.7
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