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First Cut: Philadelphia Fed nonmanufacturing index for March showed ‘significant weakening’ related to coronavirus

The Philadelphia Fed’s general business activity index for the service sector plummeted to -35.1 in March after rising to 31.0 in February when it was the highest in 14 months. The March reading was the first negative since -5.5 in September 2012 and the lowest since -41.2 in September 2011. The index for activity six months from now had a similar performance, dropping to -36.9 in March after 32.9 in February. The Philadelphia Fed said, “Nonmanufacturing firms reported a significant weakening in regional nonmanufacturing activity this month” and noted the coincidence with “developments related to the coronavirus”. The survey was compiled from responses collected form March 5 to March 19. The swift and deep reversal of activity cannot be said to be a surprise, but it is disturbing nonetheless.

Nonmanufacturing businesses in the Philadelphia District also reported a steep fall off in activity in March with the index for firms at -12.8 after 36.1. Revenues were down sharply to -4.9 after 39.8. New orders reversed direction in March and plunged to 16.4 after 28.1 in the prior month. Order backlogs contracted for a second month in a row at -1.5 in March after -3.0 in February.

Inventories contracted at -1.7 in March after 4.6 in February. With little business to transact and no orders to provide a reason to restock, inventories are likely to remain low.

The index for full-time employment declined to -1.7 in March after 21.5 in February and the part-time index was down to -11.2 after 10.4. The workweek index showed hours were cut at -5.2 after 17.1. The index for wages and benefits showed less expansion at 26.6 after 30.7.

The sudden decline in energy prices was probably one of the main reasons behind the drop in the index for prices paid to 6.0 in March from 21.3 in February. The index for prices received showed little pricing power at 0.5 after 14.5.

The Philadelphia Fed’s index for nonmanufacturing has only a so-so correlation with the ISM Non-Manufacturing Index (0.447). But taken in context with the plunge in the New York Fed’s general business activity index for services, there is a strong signal the the ISM measure is going to rapidly fall into contraction in March and end the string of 121 months of expansion through February 2020.

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