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Economy in Brief

Philadelphia Fed Business Conditions Index Improves; Expectations Surge
by Tom Moeller  August 21, 2014

The Philadelphia Federal Reserve Bank reported that its General Business Conditions Index for August jumped to 28.0 from 23.9 in July. The figure was at the highest point since March 2011 and it exceeded consensus expectations for a decline to 20.0, according to the Action Economics Forecast Survey. The seasonally adjusted figure, constructed by Haver Analytics, retreated to 55.1 but remained well above the year ago level. It is comparable to the ISM Composite index. During the last ten years, there has been a 71% correlation between the adjusted Philadelphia Fed index and real GDP growth.

Higher readings for inventories and the length of the average workweek were accompanied by declines in other components. The new orders, shipments and delivery times indexes each retraced their July increases. The employment index fell to its lowest level in three months, but continued to indicate an increasing level of jobs. During the last ten years, there has been a 79% correlation between the employment index and the m/m change in nonfarm payrolls. The unfilled orders and delivery time indexes also posted declines.

Pricing power eased to the lowest level in three months. A decreased 30 percent of respondents paid higher prices while a higher 5 percent paid less. During the last ten years, there has been a 71% correlation between the prices paid index and three-month growth in the intermediate goods PPI.

The separate index of expected business conditions in twelve months surged to its highest level since June 1992. A jump in the reading for expected shipments led the gain followed by higher figures for new and unfilled orders, delivery times (slower) and inventories. The expected prices reading improved to the highest point since July 2011. To the downside, the expected employment reading retreated to its lowest level in three months and the capital expenditures index fell to its lowest level since January.

The survey panel consists of 150 manufacturing companies in Federal Reserve District III (consisting of southeastern PA, southern NJ 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, production, employment, supplier deliveries and inventories with equal weights (20% each). Each diffusion index is the sum of the percent responding "higher" and one-half of the percent responding "same."

The figures from the Philadelphia Federal Reserve can be found in Haver's SURVEYS database. The Consensus expectations figure is available in AS1REPNA.

Philadelphia Fed (%, SA) Aug Jul Jun Aug'13 2013 2012 2011
ISM-Adjusted General Business Conditions 55.1 58.6 53.9 50.1 50.0 47.8 52.0
General Business Conditions 28.0 23.9 17.8 13.1 6.4 -0.2 7.7
  New Orders 14.7 34.2 16.8 8.9 7.3 -0.1 7.2
  Shipments 16.5 34.2 15.5 3.9 7.1 -1.3 9.9
  Unfilled Orders -4.1 9.1 11.5 -0.5 -3.8 -6.5 -0.9
  Delivery Time 4.5 9.6 6.0 -5.0 -4.0 -9.1 -0.4
  Inventories 8.3 4.8 -6.7 -8.7 -3.2 -6.0 -0.3
  Number of Employees 9.1 12.2 11.9 6.0 1.5 0.1 11.0
  Prices Paid 24.9 34.7 35.0 20.4 16.7 17.7 39.3
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