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First Cut: June Philadelphia Fed manufacturing conditions get a boost from pent up demand

The general business conditions index in the Philadelphia Fed’s Manufacturing Business Outlook Survey climbed to +27.5 in June after -43.1 in May. The unexpectedly strong reading has to be scrutinized carefully. The detail indexes suggest that manufacturers in the District have reason for the burst of positive sentiment expressed by the return to expansion. However, one month is not a trend. I would be more inclined to attribute this to pent-up demand that could easily slack off in July. The index for business conditions six months from now also had a sharp increase to 66.3 in June after 49.7 in May. The rise is not as big as for current conditions, but it does reflect that manufacturers in the Philadelphia region are hopeful that a rebound is on the near horizon.

The index for new orders reached 16.7 in June after -25.7 in May and order backlogs were near neutral at -0.1 after -13.7. New orders were turned around quickly with the index for shipments at 25.3 after -30.3 in the prior month, and some may not have been able to be filled immediately with production largely shut down in recent weeks.

The index for employment improved to -4.3 in June after -15.3 in May. This suggested that some workers are being recalled after layoffs, but not a lot of new hiring is taking place. The average workweek index also continued to contract at -6.5, not much different from the -7.1 in May.

Delivery times expanded only narrowly with the index at 0.4 in June after -6.7 in May. Inventories were neutral at 0.0 in June after rising 11.7 in May. There were some finished goods that could be used to satisfy new orders coming in and stocks were quickly worked down.

The index for prices paid rose to 11.1 in June after 3.2 in May. Higher energy costs contributed to the increase along with some other commodities like foods. The prices received index rose to 11.0 in June after -3.1 in May and suggested that with renewed activity came renewed ability to pass on at least some costs.

The Philadelphia-ISM equivalent index rose to 53.8 in June from 43.4 in May. The equivalent – calculated from the five components most like those in the ISM Manufacturing Index – has a good correlation (0.780) with the ISM index. While I would discount some of the 10.4 point month-over-month increase, it certainly is a credible hint that the ISM Manufacturing Index could be within reach of the 50-mark when the data is reported at 10:00 ET on Wednesday, July 1.

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