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Economy in Brief

Philadelphia Fed Factory Conditions Improve; Prices Jump
by Gerald D. Cohen  April 19, 2018

The Philadelphia Federal Reserve reported that its General Factory Sector Business Conditions Index rose to 23.2 during April, reversing some of March's decline. Expectations had been for a reading of 21.0 in the Action Economics Forecast Survey. A slightly higher 36.9% of firms reported an improvement in business activity while a slightly lower 13.7% reported a worsening. As a diffusion index, readings above zero indicate expansion.

Haver Analytics constructs an ISM-Adjusted General Business Conditions Index. This measure weakened this month to 59.7 from March's 30-year high. During the last ten years, there has been a 68% correlation between the quarterly ISM-adjusted Philadelphia Fed Index and quarterly real GDP growth

A drop in new orders, shipments and inventories led the decline in the composite index. Unfilled orders, which is not part of the ISM-Adjusted index, also fell sharply. The continued rise in the vendor delivery index to a record high 20.7 suggests a meaningful slowing in product delivery speeds.

The employment index increased to its highest level in six months. During the last ten years, there has been an 81% correlation between the index level and the month-to-month change in manufacturing employment. Interestingly, fewer respondents reported a rising level of payrolls, but this was more than offset with a drop in layoffs. The average workweek series increased, but has been range-bound for over a year.

The prices paid index jumped to 56.4 its highest level since early 2011. The percent of respondents reporting higher prices soared to 58.9%, while just 2.5% paid lower prices. The index of prices received rose to a cycle high 29.8.

The future activity index dropped to 40.7, its lowest level in nine months. New and unfilled orders as well as employment declined, while shipments and prices paid increased.

The survey panel consists of 150 manufacturing companies in the third Federal Reserve District (which consists 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 ISM-adjusted 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 expectation from the Action Economics Forecast Survey is available in AS1REPNA.

Philadelphia Fed - Manufacturing Business Outlook Survey (%, SA) Apr Mar Feb Apr'17 2017 2016 2015
General Factory Sector Business Conditions 23.2 22.3 25.8 22.8 27.4 4.9 3.7
ISM-Adjusted Business Conditions 59.7 61.9 56.6 58.5 57.2 48.3 49.4
  New Orders 18.4 35.7 24.5 25.9 25.4 4.9 3.0
  Shipments 23.9 32.4 15.5 24.3 26.8 6.9 3.0
  Unfilled Orders 7.8 20.1 14.5 8.0 11.9 -5.6 -5.1
  Delivery Time 20.7 14.0 4.5 11.6 10.6 -4.6 -4.2
  Inventories 9.5 16.5 -0.9 13.4 2.8 -9.6 -1.4
  Number of Employees 27.1 25.6 25.2 17.2 16.2 -5.6 3.9
  Average Workweek 21.6 12.8 13.7 16.7 14.9 -5.4 -1.7
  Prices Paid 56.4 42.6 45.0 32.7 30.4 13.5 1.5
Expectations - General Business Conditions; Six Months Ahead 40.7 47.9 41.2 45.2 47.1 33.7 37.6
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