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Economy in Brief

Philadelphia Fed Manufacturing Remains Weak But Expectations Improve
by Tom Moeller  May 21, 2020

• Business activity index is negative for third straight month.

• Orders, shipments and employment readings shaved losses, while remaining negative.

• Expectations improve again.

The Federal Reserve Bank of Philadelphia reported that its General Factory Sector Business Conditions Index improved to -43.1 during May from -56.6 in April. An index of -45.0 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 modestly to 14.9% this month. The percentage reporting weaker conditions fell negligibly to 58.1%. It had surged to 60.1% last month, doubling the March reading.

Haver Analytics constructs an ISM-Adjusted General Business Conditions Index. It rose to 42.7 this month and recovered much of its April decline to 29.7. This was the lowest level since March 2009, near the end of the last recession. Over the past dozen years, there has been a 57% correlation between the ISM-Adjusted Philadelphia Fed Index and q/q real GDP growth.

Among the underlying series of the survey, which are sampled separately from the composite index, the new orders and shipments figures recovered much of their drastic April declines. The inventory figure turned positive and reversed deterioration in the prior two months. The delivery times reading turned negative, suggesting quicker product delivery speeds. The unfilled orders readings held steady in negative territory.

On the labor front, the employment index reversed much of its April deterioration which had pushed it to the lowest level since March 2009. Nevertheless, it remained sharply negative. An improved nine percent of respondents reported an increased level of hiring while a lessened 24% reported a decline. The average workweek measure recovered moderately after falling in April to a record low.

The index of prices paid improved after showing price deflation in April for the first time in roughly five years. An improved 16% percent of respondents paid higher prices while a slightly 13% paid less. The index of prices received similarly improved slightly but continued to indicate price deflation.

The Philadelphia Fed also constructs indexes of future activity. The expected General Business Conditions series improved sharply. The future new orders reading increased but the employment and prices series fell.

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) May Apr Mar May'19 2019 2018 2017
General Factory Sector Business Conditions -43.1 -56.6 -12.7 17.5 9.9 20.9 27.3
ISM-Adjusted Business Conditions 42.7 29.7 47.1 55.0 55.5 57.7 57.2
  New Orders -25.7 -70.9 -15.5 14.2 14.1 21.0 25.3
  Shipments -30.3 -74.1 0.2 23.8 16.9 22.8 26.7
  Unfilled Orders -13.7 -13.5 -7.4 3.1 7.7 7.0 11.8
  Delivery Time  -6.7 4.1 -9.1 4.6 9.4 9.5 10.6
  Inventories 11.7 -10.2 1.7 -0.5 5.1 7.2 2.8
  Number of Employees -15.3 -46.7 4.1 17.9 16.9 21.5 16.1
  Average Workweek -7.1 -54.5 0.5 12.3 9.8 15.9 14.9
  Prices Paid 3.2 -9.3 4.8 23.0 19.7 46.1 30.4
Expectations - General Business Conditions; Six Months Ahead 49.7 43.0 35.2 22.3 28.4 36.8 47.1
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