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First Cut: Philadelphia Fed manufacturing general business conditions decline in October

The general business conditions index in the Philadelphia Fed’s Manufacturing Business Outlook Survey fell to 5.6 in October from 12.0 in September and has declined for the past four months. The future business conditions index, however, rose solidly to 33.8 in October after plunging to 20.8 in September. While businesses in the factory sector are feeling the pinch of the broader slowdown in activity, the October rebound in expectations for the future suggested that survey respondents had overstated their pessimism in September. There’s no hint that conditions are anticipated to return to the heights seen in 2018. Rather, expansion is expected to chug along at a modest pace.

The detail indexes — which are not used to compute the general business conditions index — put October in a mildly better light than September.

New orders were more-or-less on trend at 26.2 in October after 24.8 in September after 25.8 in August. Backlogs kept some upward momentum and rose to 18.8 in October from 17.6. There is work coming in and some in reserve to keep activity going. Shipments dipped to 18.9 in October after 26.4 in September, a modest decline that still leaves the pace healthy enough.

Employment surged to 32.9 in October from 15.8 in September and a record high for the series. Some manufacturers may be playing catch up after a few slower months and also acting to capture workers laid off elsewhere. The index is likely to retrace the increase next month but that doesn’t change that factories were hiring and just before a period when year-end layoffs typically are made. The workweek continued to expand at a middling pace at 10.8 in October after 13.0 in September.

Delivery times were not much changed from recent months. The index slipped to 8.0 in October from 11.6 in September. Goods are moving with few delays. After adding to inventories rapidly in September with the index at 21.8, the index fell to 6.6 in October. Factories probably stocked up in advance of fresh tariffs and while goods were available to avoid problems along the supply chain.

Along with softer energy prices, the prices paid index fell to 16.8 in October from 33.0 in September. It was a similar — if less dramatic — story for prices received which declined to 16.4 from 20.8. Inflationary pressures have backed off in October.

The Philadelphia-ISM equivalent index — calculated from the five components most like the ISM Manufacturing Index — dipped to 59.3 in October from 60.0 in September. While the equivalent index is at a fairly high level, that is not reflected in the other regional surveys or the ISM index. The decrease is not a large one, but when taken in context with the behavior of the New York equivalent, it points to relatively slightly less positive conditions for the manufacturing sector, which in turn hints that the national index from the ISM is not going to emerge from its two months in contractionary territory in August and September.

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