Phili Fed Manufacturing Index Signals a Struggling Industrial Sector

The Philadelphia Fed Manufacturing Index is a monthly survey of Philadelphia-area manufacturers. Firms report on how business conditions have changed for a number of indicators, including production, new orders, employment, prices and company outlook. The Index is primarily a regional survey, but its key indexes are highly correlated with state-level measures of business activity and employment. According to the Phili Fed Index, general business activity in April increased to 8.5 from 12.5 in March. This is worse than the expected estimate of 12.0. This is essentially bearish for the manufacturing sector and negative for general economic growth in the United States. According to the report, the survey's broad indicators for general activity, new orders, shipments, and employment all remained positive but fell slightly from their readings last month. Price pressures were only slightly more widespread this month. The survey's broad indicators of future activity remained at relatively high readings, and firms were more optimistic about their plans for hiring over the next six months. The indexes for new orders and shipments, which decreased about 1 point, remain at relatively low readings. The indexes for current unfilled orders increased 14 points and returned to positive territory this month, suggesting a backlog of unfilled orders. Inventories were also reported on the rise this month, with the inventory index increasing 7 points. Firms' responses suggested a notable pickup in levels of employment this month. The current employment index, which has been positive for eight consecutive months, increased 11 points, to its highest reading in 11 months.
ACTION ITEMS:

Bullish:
Traders who believe that the Phili Fed Index is a leading indicator for the US economy, you might want to consider the following trades:
  • Short general industrial companies XLI like Illinois Tool Works ITW or Caterpillar CAT as these companies will benefit from increasing industrial production.
  • Also, short Consumer Discretionary companies like Target TGT or the Consumer Discretionary ETF XLY
Bearish:
Traders who do not believe that the Phili Fed Index is a leading indicator for the US economy, you may consider alternative positions:
  • Long Consumer Staple companies like Procter & Gamble PG and Colgate CL because even if the economy is struggling, people still need to buy staple products like shampoo and toothpaste.
  • Also, long big-ticket appliance makers like Whirlpool WHR if the manufacturing trend is worse-than-expected, as it may be oversold.
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