Philadelphia Fed Factory Sector Activity Is Expanding

• 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.

• Component gains are somewhat mixed.

• Coincident indicators rise further.

• Lagging indicators indicate less economic stress.

The Conference Board reported that its Composite Index of Leading Economic Indicators increased 1.4% during July following a 3.0% June rise  revised from 2.0%. A 1.0% gain had been expected in the Action Economics Forecast Survey. The series is comprised of 10 components which tend to precede changes in overall economic activity.

Last month's gain in the leading index again reflected mixed improvement amongst the component series. Six of the ten components rose and four fell. The largest positive contributions came from a longer factory sector workweek which added 0.6 percentage points to the index change, more building permits which added 0.5 percentage points and fewer initial unemployment insurance claims which added 0.4 points. Higher stock prices and a higher ISM new orders index also contributed positively. These gains were offset by declines in the consumer expectations for business/economic conditions index, the leading credit index and fewer orders for consumer goods & materials.

Three-month growth in the leading index surged to a record 34.2% (AR) in July, up versus a record rate of decline of 43.7% in April.

The Index of Coincident Economic Indicators increased 1.2% in July following a 2.9% June increase, revised from 2.5%. Each of the four component series increased including payroll employment which added 0.7 percentage points to the index rise and industrial production which added 0.4 percentage points. Personal income less transfer payments and manufacturing & trade sales added minimally to last month's increase.

Three-month growth in the coincident index also surged to 29.5% (AR) as it rebounded from a -25.5% rate in June.

The Index of Lagging Economic Indicators continued to indicate declining economic stress as it fell 1.0% (+0.6% y/y) after declining 2.3% in June, revised from -2.5%. Less stress included a fall in the average duration of unemployment which subtracted 0.5 percentage points. Fewer commercial & industrial loans outstanding also subtracted 0.5 percentage points while unit labor cost growth subtracted 0.3 percentage points. Working the other way, the consumer installment credit/personal income ratio and growth in the services CPI added marginally to the index change.

Three-month growth in the lagging index in July plunged to -20.4% (AR) from +28.4% three months earlier.

The ratio of coincident-to-lagging economic indicators is considered another leading indicator of economic activity. It rose sharply for a third consecutive month from its near-record low.

The Conference Board figures are available in Haver's BCI database; the components are available there, and most are also in USECON. The expectations are in the AS1REPNA database. Visit the Conference Board's site for coverage of leading indicator series from around the world.