Philly Fed Manufacturing Index Shows Steady Growth

by Ike Obudulu Posted on October 18th, 2018

Regional manufacturing activity continued to grow in October, according to results from this month’s Manufacturing Business Outlook Survey. The survey’s broad indicators for general activity, new orders, shipments, and employment remained positive and near their readings in September. The firms reported continued growth in employment and an increase in the average workweek this month. Expectations for the next six months remained optimistic.

Survey Indexes Suggest Steady Growth

The diffusion index for current general activity edged down slightly, from 22.9 in September to 22.2 this month. Nearly 36 percent of the manufacturers reported increases in overall activity this month, while 14 percent reported decreases. The new orders index decreased 2 points to 19.3, while the current shipments index increased 5 points to 24.5. The firms reported nearly no change in levels of inventories during October, as well as unfilled orders and delivery times (all of the indexes were near zero).

The firms continued to report overall higher employment. More than 30 percent of the responding firms reported increases in employment this month, while 11 percent of the firms reported decreases in employment. The current employment index increased 2 points to 19.5. The firms also reported a longer workweek this month, as the workweek index increased from 14.6 to 20.8.

Price Diffusion Indexes Less Than Earlier in the Year

The survey’s diffusion indexes for prices remained positive but lower than their readings for most of this year (see Chart 2). On the cost side, 42 percent of the firms reported increases in the prices paid for inputs, and the prices paid index, which had fallen 15 points last month, decreased 1 point to 38.2. With respect to prices received for firms’ own manufactured goods, 27 percent of the firms reported higher prices compared with 3 percent that reported decreases. The prices received index increased 5 points.

Six-Month Indicators Remain Positive

The diffusion index for future general activity edged down from a reading of 36.3 in September to 33.8 this month. Nearly 48 percent of the firms expect increases in activity over the next six months, while 14 percent expect declines. The future new orders and shipments indexes, however, increased 9 points and 1 point, respectively. The future employment index declined 2 points, but nearly 42 percent of the firms expect to add workers over the next six months.

Total Capital Spending Expected to Increase Next Year

For this month’s special questions, manufacturers were asked about current capacity utilization rates compared with the same time last year. The average capacity utilization rate reported among the responding firms was 79 percent, up by 1 percentage point from what was estimated for one year earlier. The firms were asked to forecast total capital spending for 2019 compared with levels in 2018, and more firms indicated that they would increase spending (41 percent) than decrease spending (14 percent). The firms were also asked about their plans for different categories of capital spending next year. For three categories of investment spending (software, computer and related hardware, and noncomputer equipment), the share of firms expecting to increase spending was higher than the share of firms expecting to decrease spending. Only the energy-saving investment and structure categories had more firms expecting decreases. The firms were also asked about the impact of tax reform and tariffs on their plans. On balance, the firms indicated net positive effects from the tax policy and modestly net negative effects from tariffs.

Summary

Manufacturing firms reported continued growth in regional manufacturing in October. The survey’s broad current indicators remained at high readings and were near their readings last month. Looking ahead six months, the firms remain optimistic, and the survey’s future indicators remained at relatively high levels. On balance, the firms also expect higher capital spending next 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.

Author

Ike Obudulu

Ike Obudulu

Versatile Certified Fraud Examiner, Chartered Accountant, Certified Internal Auditor with an MBA in Finance And Investments who has both worked for and consulted with some of the world's largest companies on main street and wall street in over 20 countries, Ike brings his extensive reporting and investigations experience to bear on his role as Chief Editor.
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