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Economy in Brief

Philadelphia Fed Manufacturing Index Surges Unexpectedly
by Tom Moeller  February 20, 2020

The Federal Reserve Bank of Philadelphia reported that its General Factory Sector Business Conditions Index improved to 36.7 during February from January's 17.0. It was the highest level in three years. An index of 10.2 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 52% this month. The percentage reporting weaker conditions declined to 15%.

Haver Analytics constructs an ISM-Adjusted General Business Conditions Index. It jumped to 58.0 this month from 54.7 in January, but remained below the expansion high of 61.5 in May of 2018. Over the past twenty years, there has been a 60% correlation between the ISM-Adjusted Philadelphia Fed Index and q/q real GDP growth.

Most of the underlying series, which are sampled separately, improved last month, led by a surge in new orders to the highest level since May 2018. The unfilled orders, delivery times, and inventory measures also rose. Shipments improved marginally following a January jump.

On the labor front, the employment index declined sharply to the lowest level in six months, falling below its recent high reached in July of last year. A greatly lessened 18% of respondents reported an increased level of hiring while eight percent reported a decline. During the last twenty years, there has been a 76% correlation between the jobs index and the m/m change in factory sector employment. The average workweek measure improved to a four-month high.

The index of prices paid reversed most of its January improvement, although it remained above the low three months ago. A lessened 23% of respondents paid higher prices while an increased seven percent paid less. The index of prices received strengthened to a five-month high.

The Philadelphia Fed also constructs indexes of future activity. The expected General Business Conditions series surged to the highest level since March 2018. The future new orders, shipments, delivery times and workweek measures each gain gained significantly. The employment measure continued its sideways movement. Expected capital expenditures declined. The index of future pricing power deteriorated sharply.

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) Feb Jan Dec Feb'19 2019 2018 2017
General Factory Sector Business Conditions 36.7 17.0 2.4 -0.7 9.9 20.9 27.3
ISM-Adjusted Business Conditions 58.0 54.7 55.4 52.5 55.5 57.7 57.2
  New Orders 33.6 18.2 11.1 1.5 14.1 21.0 25.3
  Shipments 25.2 23.4 15.7 -2.2 16.9 22.8 26.7
  Unfilled Orders 7.4 -3.7 8.6 7.0 7.7 7.0 11.8
  Delivery Time  2.7 -0.4 12.5 10.7 9.4 9.5 10.6
  Inventories 11.8 -2.3 5.0 3.8 5.1 7.2 2.8
  Number of Employees 9.8 19.3 16.8 16.1 16.9 21.5 16.1
  Average Workweek 10.3 5.2 8.5 4.8 9.8 15.9 14.9
  Prices Paid 16.4 22.1 15.9 23.8 19.7 46.1 30.4
Expectations - General Business Conditions; Six Months Ahead 45.4 38.4 34.8 29.0 28.4 36.8 47.1
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