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First Cut: Philadelphia Fed Non-Manufacturing Index higher for second month in a row in October

The Philadelphia Fed’s Non-Manufacturing Index for October managed to increase to 12.6 after 9.5 in September and 7.5 in August. The fast pace of growth is welcome, but still only middling and in line with the underlying tone of the data that puts growth for 2019 to-date well below the pace seen in 2018. There is not much promise that conditions will improve in coming months. The index for the six-month outlook slipped to 15.5 in October from 17.3 in September.

The rise in the headline index was mostly due to the increase in new orders which jumped to 26.9 in October form 9.7 in September and was the highest since 26.8 in September 2018. The sharp gain was probably more due to playing some catch-up after two softer months than a fundamental resurgence in demand. It did bring the order back logs index up to 3.4 after -0.6 in the prior month. The index for revenues hasn’t varied much in the past few months. It was at 25.5 in October after 22.5 in September and 28.5 in August.

The indexes related to employment are definitely softer. Full-time employment slipped to 15.9 in October after 22.1 in September and part-time was down to 10.8 after 23.5. The workweek grew less firmly at 10.8 after 12.5. The one bright spot was that wages and benefits were up to 41.9 in October after 36.1 in September. Businesses may not be hiring as much, but they are needing to offer higher pay and/or benefits to attract new employees.

The index for prices paid was down to 20.5 in October after 26.5, reflecting the declines in energy costs. Prices received fell to 8.0 after 12.0 and was the lowest since 7.5 in December 2018. Service businesses have gotten some relief from concerns about a jump in energy costs after the attacks on the Saudi oil production in September. The ability to increase prices is limited.

The Philadelphia index does not correlate well with the performance of the ISM Non-Manufacturing Index, so the mild increase should not be taken as a hint of improvement for the service sector at the national level. A better indicator will be the Richmond Fed’s revenue index when that report is released at 10:00 ET later this morning.

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