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First Cut: April Philadelphia Fed manufacturing index nears a 40-year low

The general business conditions index in the Philadelphia Fed’s Manufacturing Business Outlook Survey continued its nosedive for a second month and fell 43.9 points to -56.6 in April, its lowest since -57.1 in July 1980. On the other hand, the index for future conditions rose to 43.0 in April after 35.2 in March. Like the performance of the corresponding indexes in the New York Fed’s Empire State Manufacturing Survey, present conditions worsened markedly while anticipation of improved activity brightened somewhat. This suggests that the current downturn — deep and severe as it is — is expected to be of a short duration.

The Philadelphia general business conditions index is a measure of sentiment, not computed from the details. However, the tone of the subindexes backs up the gloomy tone of the headline.

The index for new orders plunged to a series low of -70.9 in April from -15.5 in March. The index for order backlogs was down for a second month in a row to -13.5 after -7.4 in March, the lowest since -16.7 in December 2015. There are no orders coming in and nothing in the pipeline to support activity. Shipments plummeted to -74.1 in April after 0.2 in March.

Employment fell to -46.7 in April, the first negative since -4.7 in November 2016, and the second lowest in the series history since -51.5 in March 2009. The average workweek contracted at -54.5 in April, the first negative since -2.6 in October 2016 and a series low.

Delivery times widened to 4.1 in April after narrowing at -9.1 in March. This isn’t a worrisome change — yet. Inventories contracted at -10.2 in April after 1.7 in March as goods production was curtailed and restocking was delayed.

The index for prices paid fell to -9.3 in April after 4.8 in March. The index hasn’t been negative since -0.9 in March 2016 when energy prices were similar to the present and was the lowest since -14.1 in May 2015.  The index for prices received was down to -10.6 after 6.8 and indicated that pricing power is absent at the moment.  This was the first negative since -0.9 in October 2016 and the lowest since -21.1 in July 2009 when the economy was just emerging from recession.

The Philadelphia-ISM equivalent index hit a series low of 30.2 in April. It has a good correlation (0.780) with the ISM Manufacturing Index. Taken in context with a very similar performance of the New York-ISM equivalent index, it points to a steep decline for the ISM index from the 49.1 in March.

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