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First Cut: Manufacturing general business conditions index for Philadelphia slips further in September

The general business conditions index in the Philadelphia Fed’s Manufacturing Business Outlook survey for September slipped to 12.0 after 16.8 in August. Although the detail indexes were generally higher, the index is not calculated from components, but rather a measure of perceptions about present conditions. As such, it shows that there has been a steady decrease in the past few months to a modest pace of expansion. The six month expectations index declined to 20.8 in September from 32.6 in August and indicated that the loss of upward momentum in the present is not expected to turn around soon.

The headline wasn’t very different from the median market expectation, so the decrease will not be a surprise. However, any sign that manufacturing activity is fading will be unwelcome.

The detail indexes indicated that new orders were down a bit, but still solid (24.8 in September after 25.8 in August), and that shipments rose to their firmest in five months (26.4 after 19.0). Delivery times widened (11.6 after 9.3) and remained well above neutral. The inventory index jumped (21.8 after 8.7) to its highest level since 25.8 in July 1973 and the fourth highest on record. The sharp increase is likely to be a one-off, but it does suggest that manufacturing businesses may have stocked up in a lull in the trade negotiations with China and before more tariffs went into effect.

The employment index rebounded (15.8 in September after 3.6 in August), hinting that the softness in August was merely a pause to reassess conditions after strong hiring in July and ensure that hiring was at the right pace. The workweek expanded (13.0 after 6.8) and is in line with moderate activity.

The prices paid index climbed in September (33.0 after 12.8) to its highest level since 38.9 in December 2018. Some of this was increases in costs along the supply chain, and some likely due to the rise in prices that normally takes place in early September as energy providers set rates for cooler weather. The prices received index rose (13.0 after 6.8) and was in line with recent modest efforts to pass along some of the higher production costs.

The Philadelphia-ISM equivalent index was at 60.0 for September, up from 56.6 in August and at its highest since 61.8 in May 2018. In spite of the 3.4 point increase and the strongest correlation (0.842) among the five District Bank surveys of manufacturing with the ISM Manufacturing Index, I would be cautious in interpreting this as a signal of a wider firming for the factory sector in September. It hasn’t performed closely to the national index in recent months. The detail indexes in Philadelphia report were broadly firmer, but also reflected a rebound from a soft month. Additionally, the exception was the new orders index. The reading was by no means a weak one. Nonetheless, it was down and softening orders means slower activity in general.


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