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Economy in Brief

Philadelphia Fed Manufacturing Index Plunges in March
by Tom Moeller  March 19, 2020

The Federal Reserve Bank of Philadelphia reported that its General Factory Sector Business Conditions Index deteriorated to -12.7 during March from 36.7 in February. It was the first negative reading since February 2013. An index of 11.0 had been expected in the Action Economics Forecast Survey. These figures are diffusion indexes where readings above zero indicate expansion. The percentage of firms reporting an improvement in business activity deteriorated sharply to 18% this month. The percentage reporting weaker conditions doubled to 30%.

Haver Analytics constructs an ISM-Adjusted General Business Conditions Index. It slumped to 47.1 this month from 58.0 in February. Over the past twenty years, there has been a 60% correlation between the ISM-Adjusted Philadelphia Fed Index and q/q real GDP growth.

Each of the underlying series, which are sampled separately from the composite index, deteriorated in March. The new orders, order backlog series and delivery time series turned negative. The shipments series was barely positive as it fell to the lowest level since February of last year. The inventories series also declined sharply.

On the labor front, the employment index declined sharply to the lowest level since November 2016. A lessened 17% of respondents reported an increased level of hiring while an increased 12% reported a decline. During the last twenty years, there has been a 76% correlation between the jobs index and the m/m change in factory sector employment. The average workweek measure fell to the lowest level since October 2014.

The index of prices paid also weakened to a four-year low and was down sharply from its July 2018 high. A lessened 18% of respondents paid higher prices while a greatly increased 14% paid less. The index of prices received weakened to a nine-month low.

The Philadelphia Fed also constructs indexes of future activity. The expected General Business Conditions series reversed its February improvement. The future new orders, shipments and prices series deteriorated sharply, although expected employment and inventories improved.

The survey panel consists of 150 manufacturing companies in the third Federal Reserve District (which consists of southeastern Pennsylvania, southern New Jersey 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 "no change."

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) Mar Feb Jan Mar'19 2019 2018 2017
General Factory Sector Business Conditions -12.7 36.7 17.0 14.9 9.9 20.9 27.3
ISM-Adjusted Business Conditions 47.1 58.0 54.7 55.4 55.5 57.7 57.2
  New Orders -15.5 33.6 18.2 6.4 14.1 21.0 25.3
  Shipments 0.2 25.2 23.4 20.4 16.9 22.8 26.7
  Unfilled Orders -7.4 7.4 -3.7 5.3 7.7 7.0 11.8
  Delivery Time  -9.1 2.7 -0.4 8.9 9.4 9.5 10.6
  Inventories 1.7 11.8 -2.3 16.0 5.1 7.2 2.8
  Number of Employees 4.1 9.8 19.3 11.6 16.9 21.5 16.1
  Average Workweek 0.5 10.3 5.2 10.1 9.8 15.9 14.9
  Prices Paid 4.8 16.4 22.1 21.7 19.7 46.1 30.4
Expectations - General Business Conditions; Six Months Ahead 35.2 45.4 38.4 23.1 28.4 36.8 47.1
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