Philadelphia Fed Manufacturing Index Weakens Unexpectedly as Pricing Improves

The Federal Reserve Bank of Philadelphia reported that its General Factory Sector Business Conditions Index declined to 0.3 during December following November's improvement to 10.4. It was the weakest reading in six months and still below the July high of 21.8. An index of 8.0 had been expected in the Action Economics Forecast Survey. During all of this year, the index fell to 9.9 from 21.1 in 2018. These figures are diffusion indexes where readings above zero indicate expansion. The percentage of firms reporting an improvement in business activity fell slightly to 29% this month from November's 30%. The percentage reporting weaker conditions rose sharply to 29%, the most in six months.

Haver Analytics constructs an ISM-Adjusted General Business Conditions Index. It improved modestly to 55.2 this month from 53.8 in November. The index remained well below the expansion high of 61.1 in May of 2018. In 2019, the index averaged 55.5, the lowest reading three years. Over the past twenty years, there has been a 60% correlation between the ISM-Adjusted Philadelphia Fed Index and q/q real GDP growth.

Deterioration in the General Activity Index was accompanied last month by improvement in most of the underlying series which are sampled separately. The new orders and the unfilled orders measures both increased modestly. The shipments series also recovered from its nine-month low and the inventory figure revealed renewed accumulation. The average workweek measure improved modestly but remained well below the May 2018 high.

Showing continued weakness, the employment index fell to a three-month low. A lessened 19% of respondents reported an increased level of hiring, while a reduced one percent reported a decline. During the last twenty years, there has been a 75% correlation between the jobs index and the m/m change in factory sector employment.

The index of prices paid increased moderately but remained beneath its July 2018 high. An improved 25% of respondents paid higher prices while a lessened seven percent reported lower prices. The index of prices received eased to a five-month low. Expected pricing power improved sharply.

The Philadelphia Fed also constructs indexes of future activity. The expected General Business Conditions series slipped negligibly. Deterioration in the future new orders, shipments and delivery times measures was offset by improvement in expected in order backlogs, employment and the future workweek. Expected capital expenditures also rose moderately.

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.