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First Cut: Philadelphia Non-Manufacturing Index softens in December, activity still positive

The Philadelphia Non-Manufacturing Business Outlook Survey for December put the general business conditions index at 5.8, down abruptly from the 31.7 in October. October’s reading was a sharp increase from the 8.7 in September and was probably related to the end of the government fiscal year on September 30 and the signing of new contracts. It looks like the underlying pace of activity has softened considerably toward the end of 2019, but it remains in expansion. Service sector businesses in the District are anticipating firmer conditions six months from now with that index up to 32.7 in December after 21.1 in November, the highest since 37.8 in May.

The Philadelphia measure does not correlate well with the ISM Non-Manufacturing Index, so the decline does not necessarily presage a softer performance for the national service sector. When taken in contest with the New York Business Leaders Survey general business conditions index which was essentially flat at 3.0 in December, the outlook for services remains on of mild expansion.

The index for new orders slipped to 15.7 in December from 25.6 in October. This may also be an artifact of the government end of fiscal year. The same is the case for the index for sales and revenues which fell to 10.2 after 33.5. Order backlogs remained positive with the index at 9.5 in December after 12.9 in November. An increase in inventories to 6.0 from 1.9 is likely a small, needed, and short-lived rebuilding of stocks after a couple of months of caution.

The index for full-time employment was not much changed and remained on track with much of 2019 at 21.7 in December after 21.1 in November. Part-time employment slipped to 7.3 after 10.1 and may be due to the advanced timing of the holiday season and relatively little need for new part-timers. Service businesses are paying more in wages and benefits with the index at 45.3, an almost 9 point increase from the prior month and the highest since 46.0 in September 2018. Shortage of workers with the desired skills means the upward pressure will continue in order to attract and retain workers. The average workweek expanded to 16.7 in December after 12.3 in the prior month, perhaps as contracts start gearing up.

Some potentially good news for business investment which has lagged consumer spending as a force for growth, the Philadelphia index for capital expenditures for plants rose to 19.4 in December, the highest in 2019 and not that far below 2017 and 2018. The index for expenditures on equipment and software jumped to 32.0, the highest since 36.0 in July 2018. It may be that there are investments that have been delayed and are necessary now.

 

The index for prices paid were up to 36.6 in December after 28.6 in November and reflected the fastest price increases since 38.1 in November 2018. Prices for energy were up a bit and there may be some increases in other commodities that are related to higher tariffs. The index for prices received rose a bit to 16.9 in December and was the highest in seven months. Pricing power remains uneven and modest.

 

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