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First Cut: Philadelphia Fed services general business activity climbs sharply in February

The Philadelphia Fed’s Non-Manufacturing Business Survey had a sharp climb in the general activity index to 31.0 in February after 13.4 in January and was the highest since 35.6 in November 2018. The index for future business conditions dipped a bit to 32.9 in February from 36.9 in the prior month. The data suggested that current activity was responding to some improvement in the global economy and the inking of trade deals after a long period of rocky negotiations. However, the pick up is endangered by the outbreak of COVID-19 and the necessity for quarantines in Asia by that cuts into economic activity and spreads along supply chains. Some sectors — like tourism — are already feeling the disruptions and creating renewed uncertainty for the near term.

The index for sales revenues rose over 10 points to 39.8 in February and the index for general activity for firms was up to 36.1 after 23.5 in December. These are also looking more like the period of late 2018 just as the global economic slowdown began to be felt broadly in export orders, unsettled trade policy caused businesses to turn more cautious, and then weaker conditions were exacerbated by the 35-day partial federal government shutdown that lasted from late December 2018 through most of January 2019. This year, the appearance of a potential pandemic in the form of COVID-19 could add back in some restraint.

In the mean time, the index for new orders rose to 28.1 in February, the highest since 29.6 in August 2018 and unfilled orders declined to -3.0 in February and was the first negative since -1.2 in October 2018. At the moment there is less backlog of business to smooth activity if orders decline.

The inventory index was up to 5.6 in February after 2.6 in January, a trend-like reading that puts inventories at a comfortable level of not too thin and not too abundant.

The index for full-time employment was up to 21.5 in February, back on trend after falling to 12.5 in January. Part-time employment rose more quickly at 10.4 in February after 7.5 in January. However, the index for wages and benefits showed a more modest pace of increase at 30.7 after 49.9 in January and 48.7 in December. Some of the December and January rise may be due to mandated increases in minimum wages and a consequent need to raise compensation for other workers at the lower end of the pay scale in order to retain them. However, the February index was the lowest since 27.1 in April 2018 before the labor market was stretched to the point that competition for workers began to drive up wages and benefits more quickly. The workweek continued to expand about on trend, but the 17.1 in February was down from the 19.4 in January.

The index for prices paid declined to 21.3 in February from 25.0  in January, reflecting the fall in energy costs. Prices received were a bit lower at 14.5 after 16.3, but showed some mild pricing power.

The Philadelphia Fed’s general activity index does not correlate particularly well with the ISM Non-Manufacturing Index (0.447). However, in combination with the uptick in activity in the New York Fed’s measure to 9.8 in February from 3.7 in January, the two together point to a mild rise for the ISM service sector index from the 55.5 in January when the numbers are released at 10:00 ET on Wednesday, March 4.

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