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First Cut: Philadelphia Fed manufacturing conditions at their best in three years

The Philadelphia Fed’s manufacturing general business conditions index surprised with huge jump to 36.7 in February after a similar burst of optimism to 17.0 in January. The 2020 index reading was the highest since 39.7 in February 2017. Although it was less of a leap, the index for future business conditions rose sharply to 45.4 in February after 38.4 in January, and was the highest since 46.8 in March 2018. Businesses in the District’s factory sector are responding to a mix of lower uncertainty and rising new orders.

The Philadelphia index has the second-best correlation (0.815) with the ISM Manufacturing Index among the District Bank surveys, and it is a solid one. In conjunction with rising activity in the neighboring District of New York, it suggests that the mild recession in Manufacturing that started in August 2019 bottomed out in December.

The Philadelphia-ISM equivalent index — computed from the five subindexes closest to those in the ISM index — tells a similar story. It also has a good correlation (0.780) with the ISM Manufacturing Index¬† It was up to 58.3 in February after 55.8 in January. It is increasingly looking like another above 50-month can be expected for the February ISM report when it is released at 10:00 ET on Monday, March 2.

The Philadelphia conditions index is a diffusion index and is not created from components. As such, the details can be at odds with the headline. This is not the case for February.

The new orders index was up substantially to 33.6 in February from 18.2 in January and the highest since 41.3 in May 2018. Order backlogs staged a rebound to 7.4 in February after -3.7 in January. Shipment were a bit firmer at 25.2 after 23.4.

Delivery times widened a bit to 2.7 in February after -0.4 in January. The underlying trend is hovering near neutral, not too fast and not too slow. Inventories increased rapidly to 11.8 in February from -2.3 in January, responding to fresh demand and greater confidence that it is a good time to rebuild stocks on hand.

The employment index showed hiring remained positive but was softer at 9.8 in February after 19.3 in January. Hiring may be restrained by a lack of available workers but also because of uncertainty that activity will sustain the pickup. The average workweek expanded to 10.3 after 5.2, indicating increased hours were taking up some of the slack.

The index for prices paid fell to 16.4 in February after 22.1 in January and followed energy costs down. Prices received were at 17.1 in February after 14.7 in January, and the highest since 19.7 in September when energy prices had a mild upswing. Pricing power has improved in the past few months, although it remains well below the peaks of 2017 and 2018.

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