Philly Fed Manufacturing Index Rise More Than Expected

by Ike Obudulu Posted on September 20th, 2018

Regional manufacturing activity continued to grow in September, according to results from this month’s Manufacturing Business Outlook Survey, Federal Reserve Bank of Philadelphia report released on Thursday show.

The survey’s broad indicators for general activity, new orders, shipments, and employment remained positive and increased from their readings in August. The survey’s respondents reported diminished price pressures this month. Expectations for the next six months remained optimistic, but most broad future indicators showed some moderation.

Responses to the Manufacturing Business Outlook Survey indicated continued growth for the region’s manufacturing sector in September. The survey’s broad current indicators increased from their readings last month. Looking ahead six months, the firms remain optimistic, although most future indicators moderated somewhat from their readings in August.

Current Indicators Show Improvement

The diffusion index for current general activity increased 11 points this month to 22.9 (vs 17.5 expected), returning the index to near its average reading for 2018 (see Chart 1). Over 38 percent of the manufacturers reported increases in overall activity this month, while 15 percent reported decreases. The new orders index increased 12 points to 21.4. This month, 42 percent of the firms reported an increase in new orders, up from 34 percent in August. The current shipments index also improved, increasing 3 points to 19.6. The current inventories index fell 19 points this month and recorded its first negative reading in seven months. The firms, on balance, reported an increase in unfilled orders and longer delivery times.

The firms continued to report overall higher employment. Over 26 percent of the responding firms reported increases in employment this month, up from 18 percent last month, while nearly 9 percent of the firms reported decreases in employment. The current employment index increased 3 points to 17.6.

Upward Price Pressures Diminish

The survey’s diffusion indexes for prices remained positive but decreased from their readings in August (see Chart 2). On the cost side, 44 percent of the firms reported increases in the prices paid for inputs, down from 63 percent in August, and the prices paid index decreased 15 points to 39.6. With respect to prices received for firms’ own manufactured goods, 25 percent of the firms reported higher prices compared with 35 percent last month. The prices received index decreased 14 points.

Six-Month Indicators Moderate Slightly

The diffusion index for future general activity edged down from a reading of 38.8 in August to 36.3 this month (see Chart 1). Nearly 53 percent of the firms expect increases in activity over the next six months, while 16 percent expect declines. The future new orders and shipments indexes decreased 3 points and 7 points, respectively. The future prices paid and received indexes decreased 11 points and 15 points, respectively. Nearly 55 percent of the firms expect price increases for purchased inputs over the next six months. Over 48 percent expect higher prices for their own manufactured goods, down from 62 percent last month. The future employment index was little changed from last month at 31.7, with almost 38 percent of the firms expecting to add workers over the next six months.

Most Firms Expect Higher Production During the Fourth Quarter

In this month’s special questions, the firms were asked to estimate their total production growth for the third quarter ending this month along with expected growth for the fourth quarter (see Special Questions). The share of firms reporting increases in third-quarter production (56 percent) was greater than the share reporting decreases (36 percent). Looking ahead to the fourth quarter, 50 percent of the firms expect an increase in production compared with the third quarter, while 27 percent of the firms expect decreases. For those firms forecasting an increase in production, 24 percent of the firms will need to hire additional workers; 24 percent will increase production through higher productivity without hiring additional workers; and 22 percent will increase work hours without hiring additional workers.

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.

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