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First Cut: Philadelphia Fed manufacturing conditions fall sharply in June

The general business conditions index in the Philadelphia Fed’s Manufacturing Business Outlook Survey for June fell to 0.3 after 16.6 in May. The sharp decline represents a reset after some activity got pushed forward in anticipation of the effects of higher tariffs on goods from China. For 2019 to-date, the index averaged 8.7, a level of modest expansion that looks anemic in comparison to the 21.1 for all of 2018. On the upside, expected business conditions six months from now improved to 21.4 in June after 19.7 in May, and remained consistent with anticipation further modest activity for the District’s manufacturing sector.

The data is not nearly as pessimistic as that reported on June 17 from the New York Fed for its factory sector. It is important to remember that the headline indexes reflect reported perceptions, not necessarily actual activity.  See more below.

The index is not calculated from components. However, the subindexes were consistent with expansionary conditions. New orders slipped, but were not significantly lower and were still healthy all things considered (8.3 in June after 11.0 in May). Unfilled orders expanded to their highest level in nine months and meant there was business in the pipeline to take up some slack (10.2 after 1.9, 11.3 in September 2018). Shipments were down but not out of line with the tone for most of 2019 to-date (16.6 after 27.6). Delivery times widened substantially, possibly on tariff-related supply chain disruptions (15.6 after 3.4, highest since 16.4 in May 2018). Inventories turned positive again and appear to have settled into a pattern of readings just above or below neutral (2.4 after -3.1).

The index for employment remained more or less on track at 15.4 in June after 18.2 in May, a decline that is not significant since many businesses would be anxious to capture high school and college graduates as soon as possible in May. The workweek was a bit slower in June at 7.3 after 10.9 in May, but not materially different that the underlying pace of recent months.

The index for prices paid dropped to 12.9 in June after 23.1 in May and was the lowest since 11.2 in October 2016. A decline in energy costs accounted for some of the slowing, but also prices were down for imported goods. The prices received index fell to 0.6 in June after 17.5 in May, its lowest since -0.7 in October 2016. Businesses have less pricing power at a time when costs are uncertain and wages and benefits are rising.

The Philadelphia-ISM equivalent index — calculated from the five components closest to the ISM data — was 55.8 in June, essentially unchanged from 55.7 in May. Among the five District Bank surveys of manufacturing, the Philadelphia equivalent has the strongest correlation to the ISM Manufacturing Index. As such, it suggests that the national data for the factory sector will not be much different from the 52.1 in the May ISM Manufacturing Index which was lackluster, but still expansionary.

The Philadelphia report should take much of the sting out of the sharp drop in the New York Fed’s general business conditions index to -8.6 in June after 17.8 in May, and the New York-ISM equivalent falling below neutral at 48.4 in June after 52.7 in May. If the Richmond Fed’s Survey of Manufacturing for June at 10:00 ET on June 25 is similar to the Philadelphia report, it will relieve fears of a further deterioration for the factory sector while trade and tariff policy is unsettled and global growth is slow, at best.

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