Philly Fed Manufacturing Index Rebounds More Than Expected In July

by Ike Obudulu Posted on July 19th, 2018

After reporting a notable slowdown in the pace of growth in regional manufacturing activity in the previous month, the Federal Reserve Bank of Philadelphia released a report on Thursday showing the pace of growth in manufacturing activity rebounded more than expected in July.

The Philly Fed said its index for current general activity climbed to 25.7 in July from 19.9 in June, with a positive reading indicating growth in regional manufacturing activity. Economists had expected the index to inch up to 22.0.

Responses to the July Manufacturing Business Outlook Survey indicate continued expansion for the region’s manufacturing sector. The firms reported increases in new orders, but employment growth was less widespread than in June. The firms also continued to report higher prices for inputs and their own manufactured goods. Looking ahead six months, the firms remain optimistic overall, but the survey’s future indicators continued to moderate.

July 2018 Manufacturing Business Outlook Survey

Regional manufacturing activity continued to expand in July, according to results from this month’s Manufacturing Business Outlook Survey. All the broad indicators remained positive, with the general activity and new orders indexes improving this month. The survey’s price indexes suggest widespread increases for purchased inputs, and more firms reported price increases for their own manufactured goods. Expectations for the next six months continued to moderate but remain positive overall.

Current Indicators Reflect Continued Growth

The diffusion index for current general activity increased 6 points this month (see Chart 1). Over 44 percent of the manufacturers reported increases in overall activity this month, while 19 percent reported decreases. The new orders index rebounded 14 points after falling 23 points in June. Nearly 46 percent of the firms reported an increase in orders, and 14 percent reported declines. The current shipments index, however, decreased 4 points. The firms reported, on balance, increases in unfilled orders and longer delivery times this month.

The firms continued to report overall higher employment, but increases were not as widespread this month. Over 24 percent of the responding firms reported increases in employment this month, down from 34 percent last month. The current employment index fell 14 points to 16.8. The current average workweek index declined 11 points.

More Firms Report Price Increases

The manufacturers continued to report higher prices for both purchased inputs and their own manufactured goods. Price increases for purchased inputs were reported by 63 percent of the manufacturers this month, up from 54 percent last month. The index has now risen 30 points since January. The current prices received index, reflecting the manufacturers’ own prices, increased 3 points. Over 36 percent of the firms reported higher prices for their manufactured goods this month.

Six-Month Indicators Continue to Moderate

The diffusion index for future general activity decreased for the fourth consecutive month, falling from 34.8 in June to 29.0 this month . Over 42 percent of the firms expect increases in activity over the next six months, while 13 percent expect declines. The future new orders index decreased 10 points, but the future shipments index was virtually unchanged. More than 60 percent of the firms expect price increases for purchased inputs over the next six months. Over 52 percent expect higher prices for their own manufactured goods. The future employment index decreased 7 points to a reading of 27.5, with almost 35 percent of the firms expecting to add workers over the next six months.

Fewer Firms Report Summer Slowdowns This Year

In this month’s special questions (see Special Questions), firms were asked to assess the importance of seasonal factors in production and whether these seasonal factors have changed in importance over time. Most firms (61 percent) reported that seasonal factors were not significant; however, 36 percent indicated that they were. The firms continued to report that the most common pattern was increased production during the spring and fall and decreased activity in midsummer and during the winter months. Similar to the pattern reported last year, nearly 52 percent of the firms with seasonal patterns reported no difference in seasonal effects, 26 percent saw seasonal patterns as less important, and only 8 percent indicated they were more significant. The firms were also asked about whether they were scheduling plant shutdowns or production slowdowns during the summer months this year. Over 19 percent indicated that such slowdowns were scheduled this summer, down from 26 percent when the question was asked last year.

Why Markets Care About Philly Fed Manufacturing Index

Philly Fed Manufacturing Index (Also called The Manufacturing Business Outlook Survey) is a monthly survey of manufacturers in the Third Federal Reserve District.

Participants indicate the direction of change in overall business activity and in the various measures of activity at their plants: employment, working hours, new and unfilled orders, shipments, inventories, delivery times, prices paid, and prices received.

The survey has been conducted each month by the Federal Reserve Bank of Philadelphia since May 1968. It is released monthly, around the middle of the current month

It Measures Level of a diffusion index based on surveyed manufacturers in Philadelphia.

The usual effect is that  ‘Actual’ greater than ‘Forecast’ is good for the dollar and vice versa.

Philly Fed Manufacturing Index is a leading indicator of economic health – businesses react quickly to market conditions, and changes in their sentiment can be an early signal of future economic activity such as spending, hiring, and investment.

Other Economy News – Conference Board (CB) Leading Index

Pointing to continuing solid growth in the U.S. economy, the Conference Board released a report on Thursday showing a bigger than expected increase by its index of leading economic indicators in the month of June.

The Conference Board said its leading economic index climbed by 0.5 percent in June after revised data showed no change in May.

Economists had expected the index to rise by 0.4 percent compared to the 0.2 percent uptick originally reported for the previous month.

“The widespread growth in leading indicators, with the exception of housing permits which declined once again, does not suggest any considerable growth slowdown in the short-term,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at the Conference Board.

The bigger than expected increase by the headline index reflected positive contributions from seven of the ten indicators, including the ISM new orders index, the interest rate spread, and the Leading Credit Index.

Building permits were the only negative contributor, while average weekly manufacturing hours and manufacturers’ new orders for non-defense capital goods excluding aircraft held steady.

The report also said the coincident economic index rose by 0.3 percent in June after inching up by 0.1 percent in May. All four indicators that make up the index increased during the month.

The lagging economic index also climbed by 0.3 percent in June following a 0.5 percent increase in May, reflecting positive contributions from four of its seven components.

The positive contributors included commercial and industrial loans outstanding, the average prime rate charged by banks, the average duration of unemployment, and the ratio of consumer installment credit outstanding to personal income.

Other Economy News – Natural Gas Storage

The U.S. Energy Information Administration (EIA) reported weekly climb of 46 billion cubic feet (Bcf) in U.S. natural gas supplies on Thursday. Working gas in storage was 2,249 Bcf as of Friday, July 13, 2018, according to EIA estimates. This represents a net increase of 46 Bcf from the previous week. Stocks were 710 Bcf less than last year at this time and 535 Bcf below the five-year average of 2,784 Bcf. At 2,249 Bcf, total working gas is within the five-year historical range.

EIA natural gas storage report (also called Natural Gas Stocks, Natural Gas Inventories, Working Gas) measures change in the number of cubic feet of natural gas held in underground storage during the past week.

There is no consistent effect as there are both inflationary and growth implications. Inventories are used to maintain price stability during supply shortages and periods of increasing demand.

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