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First Cut: Philadelphia Fed manufacturing general business conditions turn negative in February

The Philadelphia Fed’s manufacturing general business conditions index fell sharply to -4.1 in February from 17.0 in January and was the lowest since -5.1 in May 2016. Signs of a modest rebound in January were rolled back in February and offered a warning that conditions for the factory sector are likely to be more volatile and less robust than in the past year or two. Some of it can be attributed to businesses trying to adapt to an uncertain trade and fiscal environment, but there also seems to be a fundamental reset to a lower pace of activity. The six-month outlook was essentially flat at 31.3 in February from 31.2 in January, and only narrowly faster than readings at the end of 2018.

The index for new orders fell to -2.4 in February to its lowest level since -2.6 in May 2016. Unfilled orders continued to expand at 6.9 in February after 5.4 in January, perhaps reflecting the surge in new orders in January to 21.3 after 13.3 in December. Shipments declined to -5.3 to its lowest level since -6.7 in September 2016. Delivery times were little changed at 13.6 in February from 13.4 in January, slightly elevated readings that could be in part due to weather-related delays during a period of bitter cold. Inventories expanded at 3.3 in February, turning positive again after -7.6 in January. Employment remained about on trend at 14.5 in February from 9.6 in January, indicating that even with slower conditions, businesses are still seeking skilled workers to fill orders. The workweek expanded more slowly at 4.7 in February from 6.0 in the prior month.

Prices paid were down for a seventh straight month at 21.8 in February from 32.7 in January. Energy prices remain the main driver behind the lessening upward pressure, but other commodities contributed as well.  Businesses still have some pricing power as prices received were higher at 27.7 in February from 24.8 in January and more-or-less on trend with the past year.

The Philadelphia-ISM equivalent index was down 2.4 points to 52.4 in February. The Philadelphia calculation has a strong correspondence to the ISM Manufacturing Index (0.851) and hints that the national report could be below the 56.6 in January.


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