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News Link • Economy - Economics USA

Philly Fed Plunges to -7.7: Let's Look At The Ugly Numbers

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Philly Fed comes in at -7.7, trouncing expectations of 7.0, and is the lowest number since August 2009, and first contraction since July 2009. Was the number even in the range of bearish expectations? Where is Steve Liesman - the survey respondents need some perking up: "the region’s manufacturing executives expect growth in business over the next six months, but optimism has waned notably in recent months." Those who look at the chart and think they are seeing the ECRI Leading Indicators are forgiven. Results from the Business Outlook Survey suggest that regional manufacturing activity weakened in August, after two months of slowing activity. Indexes for general activity, new orders, and shipments all registered negative readings this month. Firms also reported declines in employment and work hours. The survey’s broad indicators of future activity continue to suggest that the region’s manufacturing executives expect growth in business over the next six months, but optimism has waned notably in recent months. Indicators Suggest Weakness The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a reading of 5.1 in July to ?7.7 in August. The index turned negative, marking a period of declining monthly activity for the first time since July 2009 (see Chart). Indexes for new orders and shipments also suggest a slowing this month; the new orders index fell slightly, to ?7.1, while the shipments index turned negative, declining to ?4.5. Indicating weakness, indexes for both delivery times and unfilled orders remained negative this month. The percentage of firms reporting a decline in employment (23 percent) was higher than the percentage (20 percent) reporting an increase. More concerning was the significant drop in the average employee workweek index from 1.7 in July to ?17.1 in August. Firms Report Lower Prices for Products On balance, firms reported declines in prices for their own manufactured goods: More firms reported decreases in prices (19 percent) than reported increases (6 percent). The largest percentage, 70 percent, reported no change in prices for their manufactured goods. Firms reported somewhat less cost pressures over the past three months. The prices paid index decreased 1 point this month, to 11.8. Manufacturers Expect Continued Growth The future general activity index remained positive for the 20th consecutive month but weakened slightly (see Chart). The future new orders index increased to 25.7 and shipments remained unchanged. Information about future inventories suggests that drawdowns are expected in the next six months. The percentage of firms expecting employment to decrease over the next six months (22 percent) slightly exceeded the percentage expecting increases (21 percent). The future employment index decreased 14 points, moving the index into negative territory. In special questions this month, firms were asked about exporting activity and any changes to production outsourcing or “insourcing,” the return of operations from abroad (see Special Questions). About 30 percent of the firms indicated that the share of sales attributed to exports increased over the past year, a trend consistent with the previous two years. Among firms that reported an increase in export share, the mean response indicates that 13.6 percent of sales growth is attributable to exports. Since the start of 2010, roughly 10 percent of firms have moved some activities abroad; only 5 percent have returned activities to the U.S.

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