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Economy in Brief

Philadelphia Fed Index Plummets Further
by Tom Moeller January 17, 2008

The Philadelphia Federal Reserve Bank reported that it's Index of General Business Conditions in the manufacturing sector cratered to -20.9 this month from what was a revised level of -1.6 in December. The latest level was the lowest since the recession year 2001.

The index is a diffusion index for each component or series. It reflects the increase in activity reported less the decrease.

During the last ten years there has been a 59% correlation between the level of the Philadelphia Fed Business Conditions Index and the three-month growth in factory sector industrial production. There has been a 42% correlation with q/q growth in real GDP.

The decline represented broad based moves by each of the sub indexes into negative territory. New orders and inventories were notably weak while shipments, unfilled orders and vendor deliveries all were down. The employment index also fell. During the last ten years there has been a 75% correlation between the employment index and the three-month growth in factory payrolls.

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

The prices paid index also was strong, rising to the highest level since mid-2006. During the last ten years there has been a 76% correlation between the prices paid index and the three-month growth in the intermediate goods PPI. There has been an 85% correlation with the change in core intermediate goods prices.

The separate index of expected business conditions in six months fell sharply to the latest was the lowest reading since mid-2006. Expectations for new orders were notably weak but expectations for the number of employees rose for the second month.

  January December Jan. '07 2007 2006 2005
General Activity Index -20.9 -1.6 3.6 5.1 8.1 11.5
Prices Paid Index 49.8  36.5  15.6 26.4 36.6 40.1
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