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First Cut: Philadelphia Fed manufacturing activity improved sharply in March, but six months from now less optimistic

The general business conditions index in the Philadelphia Fed’s Manufacturing Business Outlook report rebounded to 13.7 in March after -4.1 in February, suggesting that while month-to-month activity is less even in its character, the underlying trend emerging since the end of 2018 is probably one of modest expansion. The index for future business conditions fell nearly 10 points to 21.8 in March, extending the generally downward momentum of the past year. Expansion is expected to remain, but the pace is anticipated to be more middling than the past two years.

The index is not computed from components. The subindexes point to narrow expansion of new orders (1.9 in March after -2.4 in February) with backlogs starting to narrow as well (3.1 after 6.9).  Shipments jumped (20.0 after -5.3) possibly in part related to aftereffects of the partial government shutdown when some orders would have been on hold due to delays in payment. Delivery times were a bit quicker (8.8 after 13.6) as goods were moving through the pipeline faster. Employment (9.6 after 14.5) and the workweek (10.6 after 4.7) remained modestly expansionary, although it appears that businesses will be relying less on new hires and more on longer hours.

The index for prices paid dipped slightly (19.7 in March after 21.8 in February) but was not significantly different on energy commodities. Prices received (24.7 after 27.7) showed that businesses have retained some pricing power to pass through higher costs.

The Philadelphia-ISM equivalent index was up to 55.8 in March after 52.4 in February. The index has a strong correlation with the ISM Manufacturing Index and hints that the 54.2 reading from February could see a modestly faster pace of expansion.

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