Philadelphia Fed Manufacturing Survey Suggests Lessened Growth; Employment Surged

The Federal Reserve Bank of Philadelphia reported that its General Factory Sector Business Conditions Index declined to 5.6 in October following a September reading of 12.0. It was the lowest figure since June, down from the July high of 21.8. An index of 7.1 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 eased to 27% this month from 28% in September. The percentage reporting weaker conditions increased to 21% from 16%.

Haver Analytics constructs an ISM-Adjusted General Business Conditions Index. It fell to 58.7 this month from 59.3. These readings remained above the February low of 51.9. The index reached an expansion high of 61.1 in May of 2018. Over the past twenty years, there has been a 61% correlation between the ISM-adjusted Philadelphia Fed Index and q/q real GDP growth.

The decline in the general activity Index was accompanied by mixed performance of the underlying series. The new orders and the unfilled orders measures both rose. Forty-two percent of respondents reported higher order volumes while 16% reported a decline. The shipments, inventories and delivery times readings fell, the latter indicating the quickest product delivery speeds since May.

The employment index surged to a record high. A strengthened 35% of respondents reported an increased level of hiring, while a negligible two percent reported a deterioration. During the last twenty years, there has been a 77% correlation between the jobs index and the m/m change in factory sector employment. The average workweek measure fell slightly following a sharp increase during September. It remained well below its May 2018 high.

The index of prices paid reversed most of its September improvement and remained well below its July 2018 high. A lessened 24% of respondents reported paying higher prices while an increased seven percent reported lower prices. The index of prices received fell slightly.

The Philadelphia Fed also constructs indexes of future activity. The General Business Conditions series increased to a four-month high. The future new orders, shipments, unfilled orders and workweek measures increased while inventories, delivery times, employment and prices paid 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.