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First Cut: Philadelphia Fed non-manufacturing index plunges to record low in April

The Philadelphia Fed’s Nonmanufacturing Business Outlook Survey for April put the general business activity index at -96.4 in April, a record low that leaves little room for further declines in business sentiment. Service sector businesses were essentially closed down in April due to social distancing and stay-at-home orders which kept operations at a minimum. The index for six months from now declined to -45.8 in April from -36.9, suggesting that gloom around the near-term outlook is deepening.

The index for activity for individual firms fell to-82.5 after -12.8 in March, and sales revenues dropped to -87.9 from -4.9. New orders plunged to -67.2 in April after -16.4 in March, and order backlogs continued to contract at -18.8 after -1.5. The index for inventories was up to 1.9 in April after -1.7 in March but probably reflects slow movement of stocks on hand rather than any resupplying.

The indexes associated with employment weakened significantly in April. The index for full-time employment was down to -47.5 after -1.7 in March and part-time employment fell to -50.7 after -5.2. The workweek contracted to -50.7 after -5.2 in the prior month. Wages and benefits declined to -35.7 after 26.6 in March and was the first negative in the series history.

The index for prices paid followed energy costs lower and fell to -0.4 in April after 6.0 in March. It was the first negative since -1.4 in February 2017. Prices received fell to -15.4 after 0.5, and was the first negative since -3.7 in August 2016.

The Philadelphia index has only a loose correlation (0.447) with the ISM Non-Manufacturing Index and might not signal a sharp downturn for the national number when it is released at 10:00 ET on Tuesday, May 5. However, the fact that the neighboring general business activity index in the New York Fed’s survey for the service sector fell 63.4 points to -76.5 in April indicates wider conditions have indeed plunged month-over-month. Between the two reports, there is little reason to think that the next data for the service sector out of the Richmond, Dallas, and Kansas City Feds will tell a different story. While the situation is exceptional, there is nothing surprising in the steep regional decline in activity in light of measures to stem the spread of COVID-19.

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