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First Cut: Philadelphia manufacturing general business conditions improve in May, but still lag most of 2018

The general business conditions index in the Philadelphia Fed’s Manufacturing Business Outlook rose to 16.6 in May from 8.5 in April, suggesting that manufacturers in the District find activity moderate. The index is not back to levels seen through most of 2018, however, it is in line with solid expansion. The outlook for six months from now has settled into readings that are similar to early 2016. While less expansive than most of the past three years, it still indicates that activity is expected to be at least modest.

The index is not computed from components. The individual subindexes were mixed in tone. New orders declined (11.0 in May after 15.7 in April) but appear to be on a firmer footing than in the prior two months. Order backlogs increased a bit (1.9 after 0.4) without hinting at any significant bottlenecks for filling them. Delivery times were longer (3.4 after -5.1) although some of that may be due to a rebound after winter weather and flooding impacted some supply chains in the prior month. Inventories turned negative for only the second time since November 2017 (-3.1 after 2.6) and are likely to continue to hover just above or below the neutral mark as businesses adjust to overall slower conditions. The sharp rise in shipments (27.6 after 18.4) probably reflects the quick filling of the increased orders received in the prior month rather than renewed upward momentum.

Prices paid and prices received were not much changed in May. Prices paid increased slightly to 23.1 in May from 21.6 in April on steady increases in energy costs. Prices received slipped to 17.5 in May from 20.0 and were the slowest expansion since 15.0 in December 2017. Pricing power has ebbed, although if last year’s experience of increases in tariffs is anything to go by, it may rise again.

The Philadelphia-ISM equivalent index was up to 55.7 in May from 54.6 in April. The index is computed from the five subindexes that most closely resemble the ISM Manufacturing Index components. The Philadelphia equivalent has a strong correlation with the ISM index. Unlike the equivalent index for the New York District, it points to a firming in the ISM number of 52.8 in April.

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