Philadelphia Fed Activity Index Fell Sharply

The Philadelphia Fed reported that its Index of General Business Conditions in the manufacturing sector fell sharply in January to 13.2 from a downwardly revised 25.4 the prior month. The Consensus expectation had been for a reading of 25.

During the last ten years there has been a 68% correlation between the level of the Philadelphia Fed Business Conditions Index and three month growth in factory sector industrial production. There has been a 53% correlation with q/q growth in real GDP.

Lower readings for new orders and shipments were notable, both falling to the lowest levels in over a year. Conversely, the index for the number of employees improved moderately to the highest level since September.

The business conditions index reflects a separate survey question, not the sub indexes.

The separate index of expected business conditions in six months also fell sharply to the lowest level since March 2001.

The prices paid index more than reversed the prior month's decline and rose to the highest level since 1980. During the last ten years there has been a 74% correlation between the prices paid index and the three month growth in the intermediate goods PPI. The correlation with the finished goods PPI has been 47% and with the CPI it's been 43%.

The Philadelphia Fed index is based on a survey of 250 regional manufacturing firms, but these firms sell nationally and internationally.

The latest Business Outlook survey from the Philadelphia Federal Reserve Bank can be found here.

The University of Michigan's preliminary reading of consumer sentiment in January fell to 95.8 versus Consensus expectations for little change m/m at 97.5. During the last ten years there has been a 74% correlation between the level of consumer sentiment and the y/y change in real PCE.

Consumer expectations slumped 5.0% m/m and reversed nearly all of a 6.7% jump in December. The decline in expectations was to the lowest level since last May.

The reading of current conditions improved for the fourth consecutive month to the highest level since late 2000. During the last ten years there has been an 81% correlation between the current conditions index and y/y growth in payroll employment.

Sentiment amongst families earning less than $50,000 per year reversed most of the surge in December (+5.3% y/y. Consumer sentiment amongst families earning more than $50,000 per year rose moderately (-8.9% y/y).

The University of Michigan survey is not seasonally adjusted.The mid-month survey is based on telephone interviews with 250 households nationwide on personal finances and business and buying conditions. The survey is expanded to a total of 500 interviews at month end.

This 2003 article from the Federal Reserve Bank of Richmond examines "Why Does Consumer Sentiment Predict Household Spending?"