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Economy in Brief

Philadelphia Fed Factory Sector Activity Is Expanding
by Tom Moeller  August 20, 2020

• Component movement was mixed.

• Expectations remain depressed.

The Federal Reserve Bank of Philadelphia reported that its General Factory Sector Business Conditions Index fell in August to 17.2% from 24.1% during July. It was the third consecutive positive reading following three below zero. The Action Economics Forecast Survey expected a lesser decline to 22.0%. These figures are diffusion indexes where readings above zero indicate expansion. The percentage of firms reporting an improvement in business activity fell to 28% this month from 45% in July. The percentage reporting weaker conditions eased to 11% from 21%. The survey was taken during the week ended Monday.

Haver Analytics constructs an ISM-Adjusted General Business Conditions Index. It improved to 54.1 this month and recovered last month's decline to 53.6. It was the third consecutive reading above 50, which indicates improvement in business activity. Over the past dozen years, there has been a 45% correlation between the ISM-Adjusted Philadelphia Fed Index and q/q change in real GDP.

The underlying components of business activity, sampled separately from the composite index, continued to demonstrate varied performance. New orders & shipments both fell as did unfilled orders. The inventories and delivery times measures improved, the latter indicating the shortest pace of product delivery since December.

On the labor front, the employment index declined, but remained positive for the second straight month following three below zero. The workweek similarly eased following negative readings from April to June.

The index of prices paid was little changed this month at 15%. It was the fourth consecutive positive reading. An improved 21% of respondents reported paying higher prices while an increased six percent paid less. The index of prices received was fairly stable near 12% for the third straight month.

The Philadelphia Fed also surveys expectations for business activity in six months. The Future Activity Index edged higher to nearly 39% last month from 36% after falling sharply from 66% in June. Declines amongst the underlying series, however, were widespread.

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) Aug Jul Jun Aug'19 2019 2018 2017
ISM-Adjusted Business Conditions 54.1 53.6 53.7 55.4 55.5 57.7 57.2
General Factory Sector Business Conditions 17.2 24.1 27.5 13.1 9.9 20.9 27.3
  New Orders 19.0 23.0 16.7 21.6 14.1 21.0 25.3
  Shipments 9.4 15.3 25.3 18.1 16.9 22.8 26.7
  Unfilled Orders -0.6 3.9 -0.1 9.5 7.7 7.0 11.8
  Delivery Time  7.3 -6.4 0.4 9.8 9.4 9.5 10.6
  Inventories -1.9 -11.8 0.0 6.9 5.1 7.2 2.8
  Number of Employees 9.0 20.1 -4.3 5.9 16.9 21.5 16.1
  Average Workweek 11.3 17.2 -6.5 5.7 9.8 15.9 14.9
  Prices Paid 15.3 15.7 11.1 14.7 19.7 46.1 30.4
Expectations - General Business Conditions; Six Months Ahead 38.8 36.0 66.3 31.8 28.4 36.8 47.1
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