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Economy in Brief

Philadelphia Fed Manufacturing Growth Continues; Pricing Pressure Eases
by Tom Moeller  October 18, 2018

The Philadelphia Federal Reserve reported that its General Factory Sector Business Conditions Index dipped to 22.2 during October following a rise to 22.9 in September. The latest reading compared to expectations for a greater decrease to 20.0 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 fell to 35.9%, down from the high of 48.2% in May of last year. The number reporting a worsening eased to 13.7%, half the percentages early in 2016.

Haver Analytics constructs an ISM-Adjusted General Business Conditions Index. The figure fell slightly this month to 55.7 and remained down versus its March peak of 61.9. During the last ten years, there has been a 66% correlation between the quarterly ISM-adjusted Philadelphia Fed Index and quarterly real GDP growth.

Movement amongst the components of the survey was mixed last month. To the down side were the new and the unfilled orders series. A sharp decline in the delivery times series indicated the quickest product delivery speeds in two years. Moving higher were the shipments and inventory figures.

Also showing improvement were the labor market readings. The employment figure rose to its highest level since June. During the last ten years there has been an 80% correlation between the employment index and the m/m change in factory sector payrolls. A higher 30% of respondents reported increased hiring while eleven percent indicated less. The index of future employment slipped m/m and remained well below its May high. The average workweek reading rose to its longest since June.

Pricing power slackened as the prices paid gauge fell to its lowest level in nine months. A sharply lessened 42% of firms reported higher prices while four percent reported a decline. The index of prices received rose slightly m/m, but remained well below its high in May.

The index measuring expectations of future business conditions eased m/m and remained well below the high reached in March of last year. Expected employment, delivery times and unfilled orders fell, but the new orders and shipments readings increased. Expected capital expenditures weakened.

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.

Philadelphia Fed - Manufacturing Business Outlook Survey (%, SA) Oct Sep Aug Oct'17 2017 2016 2015
General Factory Sector Business Conditions 22.2 22.9 11.9 28.8 27.4 4.8 3.7
ISM-Adjusted Business Conditions 55.7 56.3 55.6 60.1 57.2 48.2 49.4
  New Orders 19.3 21.4 9.9 23.3 25.4 4.9 3.0
  Shipments 24.5 19.6 16.6 26.0 26.8 6.9 3.0
  Unfilled Orders -2.3 12.6 5.6 12.1 11.9 -5.6 -5.1
  Delivery Time 0.2 11.1 6.4 19.9 10.6 -4.6 -4.2
  Inventories -0.8 -3.5 15.4 -0.8 2.8 -9.6 -1.4
  Number of Employees 19.5 17.6 14.3 30.7 16.2 -5.6 3.9
  Average Workweek 20.8 14.6 10.7 18.5 14.9 -5.4 -1.7
  Prices Paid 38.2 39.6 55.0 37.6 30.4 13.5 1.5
Expectations - General Business Conditions; Six Months Ahead 33.8 36.3 38.8 47.2 47.1 33.7 37.6
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