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First Cut: Philadelphia Fed manufacturing index rebounds in July to highest in 10 months

The general business conditions index in the Philadelphia Fed’s Manufacturing Business Outlook Survey rebounded to 21.8 in July from 0.3 in June and was the highest since 21.4 in September 2018. The index for future business conditions also staged a big comeback, rising to 38.0 in July after 21.4 in June and the highest since 38.8 in May 2018.

The Philadelphia index has been alternating between softer and firmer readings since late in 2018. Underlying conditions appear more unsettled, but except for the one negative in February of -4.1 when the impacts from the 35-day government shutdown lingered, the readings remain expansionary, if less robust than the long string of consistently high levels in 2017 and most of 2018.

The index is not computed from components. However, the tone for the subindexes points to a good month for activity in July. New orders firmed over 10 points to 18.9 in July after 8.3 in June and were the highest since 21.3 in January. Unfilled orders narrowed to 3.7 after 10.2 in the prior month, but were in line with the underlying trend. Shipments increased sharply to 24.9 in July from 16.6 in June. Delivery times were not much changed at 15.0 from 15.6 a month ago and point to some delays along the supply chain, possibly related to difficulties related to tariff policy. Inventories rose to 8.1 in July after 2.4 in June. Businesses may be increasing stocks on hand to ensure materials are available if punitive tariffs go into effect and disrupt supply chains and/or increase costs.

The index for employment nearly doubled in July to 30.0 from 15.4 in the prior month and is a return to the peaks seen in 2018. Some hesitancy to hire emerged in late 2018 and continued to build into early 2019. However, a strong outlook for activity needs workers to meet demand and factories are going to try to capture available workers, especially if there are layoffs in a few pockets of the manufacturing sector. The workweek index tripled in July to 23.0 after 7.3 in the prior month and was the strongest since 31.3 in May 2018. Factories are ramping up hours to meet orders.

The index for prices paid increased to 16.1 in July from 12.9 in June, but upward pressures are quite low overall. The increase may have been due to mild gains in energy costs. Prices received rose to 9.5 in July from 0.6 in June. While the increase shows a little more pricing power on the part of businesses, it is only a fraction of what it was in 2017 and 2018.

The Philadelphia-ISM equivalent index rose nearly 4 points to 59.7 in July from 55.8 in June. The Philadelphia equivalent has the strongest correlation (0.842) with the ISM Manufacturing Index compared to the other four District Bank surveys for the factory sector. I think the July calculation probably overstates that the possibility the ISM index will rise sharply from the 51.7 in June when it is reported at 10:00 ET on Thursday, August 1. Nonetheless, when read in context with the mild gain signaled by the New York-ISM equivalent of 49.0 in July from 48.4 in June, it offers a more positive expectation for manufacturing at the national level.

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