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First Cut: Conditions a little less grim in May for Philadelphia Fed manufacturers

The general business conditions index in the Philadelphia Fed Manufacturing Business Outlook Survey managed to rise to -43.1 in May after plunging to -56.6 in April. This should not be read with any particular satisfaction as it remains at a grim level for current activity. However, the future business conditions index was up for a second month in a row to 49.7 in May after 43.0 in April. Businesses in the District’s factory sector appear to expect a rebound six months from now. It is hard to say if this is a realistic expectation given high levels of uncertainty and risks to the outlook. Nonetheless, confidence will play a part in recovering from the COVID-19 crisis and it is good to see that it exists.

The general business conditions index is not computed from components. However, the tone of the details in the report support the improvement in the headline number.

New orders continued to contract at -25.7 in May but significantly less so than the -70.9 in April. Order backlogs were little changed at -13.7 after -13.5. in the prior month. Without orders to fill, shipments remained weak at -30.3 in May if firming from the -74.1 in April.

Employment and hours also remained weak in May with some improvement from April. The employment index was up to -15.3 after -46.7 in the prior month, and the workweek contracted less at -7.1 after -54.5.

Delivery times were slower at -6.7 in May after 4.1 in April as goods moving through the pipeline were in less demand and/or shorter supply. Inventories were up to 11.7 in May from -10.2 in April as what manufacturing activity there was built up some stocks.

The index for prices paid was up to 3.2 in May after -9.3 in April. Energy prices were more stable and in some cases slightly higher. Other commodity costs were mixed but on net a little higher as well. Pricing power continued to be absent. The index for prices received improved, but only to -3.1 in May from -10.6 in April.

The Philadelphia-ISM equivalent index for May signaled ongoing contraction for the manufacturing sector. However, the May reading was 43.4 compared to the weak 30.2 in April. The equivalent index – calculated from the five components most like the ISM Manufacturing Index – has decent correlation with the ISM measure (0.780). In context with the increase in the New York-ISM equivalent (40.5 in May after 31.2 in April) it hints that the ISM Manufacturing Index could be higher than the 41.5 in April when the May data is released on Monday, June 1 at 10:00 ET.

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