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First Cut: Sharp drop in Philadelphia Fed’s general manufacturing conditions index in March no surprise

The general business conditions index in the Philadelphia Fed’s Manufacturing Business Outlook to -12.7 in March from 36.7 in February was no surprise, but it was more than expected. It adds to the gloom surrounding the economy during the first weeks of the spread of COVID-19 in the US. The outlook for six months from now remained positive but declined to 35.2 in March from 45.4 in February.

The Philadelphia index is a measure of sentiment — not calculated from components — so it may reflect the shock at the rapidity of the pandemic’s spread and its immediate negative impacts on the domestic economy as well as intensification of weakening conditions around the globe. There’s also a backlash from the nearly 20-point upswing in February from January. Nonetheless, it follows the lead of the survey of manufacturing from the neighboring New York District.

There was a sharp fall off in the index for new orders to -15.5 in March after rising to 33.6 in February. The index for shipments was essentially flat at 0.2 after 25.2 in the prior month. Delivery times narrowed to -9.1 after 2.7 with goods moving along rapidly in the absence of competition along the supply chain and few new orders to satisfy. Inventories narrowed to 1.7 in March after rising to 11.8 in February when businesses has a brief moment of optimism and restocked.

The index for employment remained in expansion at 4.1 in March after 9.8 in February, but it is at its lowest since -4.7 in November 2016. While there are likely open spots for some skilled workers and businesses are willing to hire when a qualified applicant can be found, this is unlikely to continue with the lack of new orders. The average workweek barely expanded at 0.5 in March after 10.3 in February and will probably start to contract in April.

The index for prices paid fell to 4.8 in March after 16.4 in February, its lowest since -0.9 in March 2016. Part of it is due to rapid falls in energy costs, but also that other commodities prices may have little or no upward pressure, especially from imported goods. The index for prices received was down to 6.8 in March after 17.1 in February and was the lowest since 2.7 in June 2019 when the outlook for recession was more worrisome.

The Philadelphia-ISM equivalent index has a solid correlation with the ISM Manufacturing Index (0.780). For March, the equivalent index fell 10.2 points to 48.1. While I think the drop overstates the magnitude of a possible decline in the national measure, it cannot be dismissed in the context that the New York-equivalent index was down 7.3 points to 49.6. Taken together, the ISM Manufacturing Index is set for a return to sub-50 readings when the March report is released at 10:00 ET on Wednesday, April 1.


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