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Economy in Brief

Philadelphia Fed Manufacturing Index Plunges in April
by Tom Moeller  April 16, 2020

• Business activity weakens broadly.

• Improved expectations reading likely helped by stimulus plan.

The Federal Reserve Bank of Philadelphia reported that its General Factory Sector Business Conditions Index declined sharply to -56.6 during April from -12.7 in March. An index of -25.0 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 fell sharply to 3.5% this month. The percentage reporting weaker conditions surged to 60%.

Haver Analytics constructs an ISM-Adjusted General Business Conditions Index. It dove to 29.7 this month from 57.1 in March. That equaled the lowest level since March 2009 which was near the end of the last recession. Over the past twenty years, there has been a 60% correlation between the ISM-Adjusted Philadelphia Fed Index and q/q real GDP growth.

All but one of the underlying series, which are sampled separately from the composite index, deteriorated in April. The new orders and shipments figures posted the most dramatic declines while the order backlog series and inventories also fell. The delivery times reading improved slightly, suggesting slower product delivery speeds.

On the labor front, the employment index declined sharply to the lowest level since March 2009. No respondents reported an increased level of hiring while a greater 47% 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 fell sharply to a record low.

The index of prices paid also weakened and showed price deflation for the first time in roughly five years. A lessened nine percent of respondents paid higher prices while a greatly increased 18% paid less. The index of prices received similarly showed price deflation.

The Philadelphia Fed also constructs indexes of future activity. The expected General Business Conditions series improved slightly. The future shipments, unfilled orders and prices series edged higher but remained at depressed levels.

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) Apr Mar Feb Apr'19 2019 2018 2017
General Factory Sector Business Conditions -56.6 -12.7 36.7 11.0 9.9 20.9 27.3
ISM-Adjusted Business Conditions 29.7 47.1 58.0 54.3 55.5 57.7 57.2
  New Orders -70.9 -15.5 33.6 16.0 14.1 21.0 25.3
  Shipments -74.1 0.2 25.2 18.2 16.9 22.8 26.7
  Unfilled Orders -13.5 -7.4 7.4 3.6 7.7 7.0 11.8
  Delivery Time  4.1 -9.1 2.7 -3.7 9.4 9.5 10.6
  Inventories -10.2 1.7 11.8 3.5 5.1 7.2 2.8
  Number of Employees -46.7 4.1 9.8 15.1 16.9 21.5 16.1
  Average Workweek -54.5 0.5 10.3 10.7 9.8 15.9 14.9
  Prices Paid -9.3 4.8 16.4 22.2 19.7 46.1 30.4
Expectations - General Business Conditions; Six Months Ahead 43.0 35.2 45.4 22.2 28.4 36.8 47.1
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