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Economy in Brief

Philadelphia Fed Manufacturing Index Strengthens Unexpectedly; Pricing Improves
by Tom Moeller  January 16, 2020

The Federal Reserve Bank of Philadelphia reported that its General Factory Sector Business Conditions Index surged to 17.0 during January, the highest level since May of last year. An index of 3.0 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 sharply to 39% this month. The percentage reporting weaker conditions declined sharply to 22%.

Haver Analytics constructs an ISM-Adjusted General Business Conditions Index. It declined modestly to 54.7 this month from 55.4 in December. The index remained well below the expansion high of 61.5 in May of 2018. In 2019, the index averaged 55.5, the lowest reading in three years. Over the past twenty years, there has been a 61% correlation between the ISM-Adjusted Philadelphia Fed Index and q/q real GDP growth.

Improvement in the General Activity Index was accompanied this month by a rise in most of the underlying series which are sampled separately. The new orders measure posted a strong increase and the shipments series also strengthened. The inventory figure fell as well as the delivery time index fell.

On the labor front, the employment index recovered its December decline. but remained below its June 2018 high. An improved 28% of respondents reported an increased level of hiring, but a raised nine percent reported a decline. During the last twenty years, there has been a 73% correlation between the jobs index and the m/m change in factory sector employment. The average workweek measure declined modestly and remained well below the May 2018 high.

The index of prices paid increased but remained beneath the July 2018 high. An improved 27% of respondents paid higher prices while a lessened five percent paid less. The index of prices received strengthened to a three-month high. Expected pricing power reversed most of its December improvement.

The Philadelphia Fed also constructs indexes of future activity. The expected General Business Conditions series increased to the highest level since May 2018. The future new & unfilled orders, shipments, inventories and delivery times measures each rose. The employment and the future workweek both fell. Expected capital expenditures surged.

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) Jan Dec Nov Jan'19 2019 2018 2017
General Factory Sector Business Conditions 17.0 2.4 8.4 14.8 9.9 20.9 27.3
ISM-Adjusted Business Conditions 54.7 55.4 54.5 54.6 55.5 57.7 57.2
  New Orders 18.2 11.1 10.1 16.7 14.1 21.0 25.3
  Shipments 23.4 15.7 13.4 14.3 16.9 22.8 26.7
  Unfilled Orders -3.7 8.6 8.2 4.7 7.7 7.0 11.8
  Delivery Time  -0.4 12.5 9.7 12.7 9.4 9.5 10.6
  Inventories -2.3 5.0 -3.5 -4.8 5.1 7.2 2.8
  Number of Employees 19.3 16.8 19.7 11.5 16.9 21.5 16.1
  Average Workweek 5.2 8.5 6.8 7.0 9.8 15.9 14.9
  Prices Paid 22.1 15.9 8.5 32.2 19.7 46.1 30.4
Expectations - General Business Conditions; Six Months Ahead 38.4 34.8 34.4 29.7 28.4 36.8 47.1
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