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Economy in Brief

Philadelphia Fed Factory Conditions Recover; Prices Surge
by Tom Moeller  July 19, 2018

The Philadelphia Federal Reserve reported that its General Factory Sector Business Conditions Index rebounded to 25.7 during July and recovered a piece of its June decline to 19.9. The gain surpassed expectations for a reading of 21.0 in the Action Economics Forecast Survey. The figures are diffusion indexes where readings above zero indicate expansion. The percentage of firms reporting an improvement in business activity increased to 44.1%, the most since May of 2017. The number reporting a worsening increased modestly to 18.5%.

Haver Analytics constructs an ISM-Adjusted General Business Conditions Index. The figure eased slightly this month to 58.6 from 58.9 and remained the lowest level since February. During the last ten years, there has been a 67% correlation between the quarterly ISM-adjusted Philadelphia Fed Index and quarterly real GDP growth.

The new orders reading recovered half of its June decline with a rise to 31.4 from 17.9. The unfilled orders rose to 11.0 from -2.7, which was only the second negative figure since September 2016. The inventories index surged to 14.4 and nearly equaled the recent high. The delivery times index improved slightly, but continued to indicate nearly the quickest product delivery speeds since February.

The labor market indicators weakened. The employment index nearly halved as it fell to 16.8, the lowest reading 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. The share of firms reporting a rising level of payrolls fell sharply to 24.1%, also the least in six months, while a modestly higher 7.4% reported a decrease. The average workweek series declined sharply m/m to 13.7, down from May's expansion high of 34.4.

The prices paid index jumped to 62.9, the highest level of the economic expansion. The percent of respondents reporting higher prices paid rose also to 62.9, while none paid lower prices. The index of prices received increased to 36.3 and roughly equaled the 29-year high.

The future activity index indicated increased pessimism as expectations fell sharply to 29.0, its lowest level in since March 2016, and down from the expansion high of 57.6 reached in March 2017. New and unfilled orders fell sharply as did employment and inventories. Prices paid and received decreased.

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, 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 "same."

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.

Can Yield Curve Inversions Be Predicted? from the Federal Reserve Bank of Cleveland is available here.

Philadelphia Fed - Manufacturing Business Outlook Survey (%, SA) Jul Jun May Jul'17 2017 2016 2015
General Factory Sector Business Conditions 25.7 19.9 34.4 23.2 27.4 4.9 3.7
ISM-Adjusted Business Conditions 58.6 58.9 61.6 53.9 57.2 48.3 49.4
  New Orders 31.4 17.9 40.6 10.6 25.4 4.9 3.0
  Shipments 24.7 28.7 25.8 21.2 26.8 6.9 3.0
  Unfilled Orders 11.0 -2.7 15.3 10.7 11.9 -5.6 -5.1
  Delivery Time 11.0 9.6 18.5 8.9 10.6 -4.6 -4.2
  Inventories 14.4 10.2 8.1 1.6 2.8 -9.6 -1.4
  Number of Employees 16.8 30.4 30.2 13.0 16.2 -5.6 3.9
  Average Workweek 13.7 24.2 34.4 7.5 14.9 -5.4 -1.7
  Prices Paid 62.9 51.8 52.6 22.3 30.4 13.5 1.5
Expectations - General Business Conditions; Six Months Ahead 29.0 34.8 38.7 39.9 47.1 33.7 37.6
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