Thursday, June 21, 2012

Philly Fed Fuels Fears of Slowdown

The Business Outlook Survey, better known as the Philly Fed Index, came out this morning and the results were not good. The data comes from a survey of approximately 160 manufacturing companies in the Third Federal Reserve District, which includes most of Pennsylvania, the southern half of New Jersey, and all of Delaware. About half the surveyed firms respond.

The diffusion index plummeted to -16.6 in June from -5.8 in May, the second negative monthly reading in a row. A negative number indicates contraction in the manufacturing sector. A more negative number indicates an increase in the rate of contraction. In other words, business conditions were not good in May and they got worse in June.

The results also indicate that new orders and shipments fell from May to June as did unfilled orders, delivery times, and inventories. While the last three items might appear encouraging, they are not. They indicate a lack of business that could eventually result in layoffs. Ironically, the survey indicated that the number of workers actually increased from May to June; however, the average number of hours worked fell. Unless business activity picks up soon, many firms will conclude they are overstaffed.

The survey also has implications for inflation, or more correctly, the lack thereof. Both input prices and prices received for finished goods fell, which should give the Federal Open Market Committee more confidence in its accommodative monetary policy.

Keep in mind that business executives tend to be optimistic by nature. Indeed, the respondents said they expect business conditions to improve over the next six months. More importantly, however, they were less optimistic than they were earlier this year.

Although these results cover only a small part of country on a geographic basis, the Third District is densely populated and includes a large number of businesses. In other words, the implications for the entire economy are not good. The results are consistent with other data that indicate a general slowdown in economic activity. GDP forecasts of 1.0% to 2.0% growth are beginning to look too optimistic.