Philadelphia Fed Survey Improves, Headline Up 14 Points to Show Slight Growth

The Philadelphia Fed Business Outlook Survey headline metric improved 14 points from February to March, now showing slight growth instead of contraction. Indicators for general activity and new orders increased notably, following negative readings over the previous two months, but are still at relatively low, but still positive, levels. The components for shipments and employment remained positive and improved slightly this month. Changes in the survey's broad indicators of future activity were mixed but continued to reflect general optimism about growth over the next six months. Relative to other Federal Reserve districts, the Philadelphia Fed includes more automotive and heavy industry manufacturing. The index is a diffusion metric, where zero is the boundary between expansion and contraction. The headline increased from a reading of -12.5 in February to 2.0 this month. The demand for manufactured goods also showed improvement this month: The new orders index increased from a reading of -7.8 in February to 0.5, its first positive reading in three months. The shipments index showed continued improvement: The index remained positive and edged higher to 3.5. The percentage of firms reporting increased shipments (25 percent) was still only slightly greater than the percentage reporting declines (22 percent). Shipments are what matters for actual economic activity, as orders can be cancelled, but new orders are forward looking and tell us what to expect in the near future. Labor market conditions showed continued signs of stability, but little overall growth. The employment index increased from 0.9 in February to 2.7 this month, its second consecutive positive reading. The percentage of firms reporting employment increases (17 percent) narrowly exceeded the percentage reporting decreases (14 percent). Firms also reported a decline of average work hours this month. The workweek index declined 11 points to -12.9. This forward-looking metric of hours worked does not portend increased hiring in coming months, as companies will give their existing employees more hours before hiring new workers. The survey's price indexes suggest little price pressures again this month. For the third consecutive month, the prices received index was slightly negative. The percentage of firms reporting lower prices for their own manufactured goods (9 percent) exceeded by a slim margin the percentage reporting higher prices (8 percent). With regard to purchased inputs, 17 percent of firms reported paying higher prices for inputs, compared with 13 percent last month. This can signal shrinking margins unless the cost differentials are made up elsewhere, such as in labor costs. Still, neither prices paid nor received show substantial increases. Looking ahead, manufacturers are more optimistic. The survey's future indicators suggest that firms expect growth in business over the next six months. The future general activity index increased slightly from a reading of 32.1 to 32.5, its fourth consecutive monthly increase. The percentage of firms expecting increases in activity over the next six months (46 percent) exceeded the percentage expecting decreases (13 percent). The indexes for future new orders and shipments showed a mixed pattern this month. The future new orders index decreased 4 points to 34.5, while the future shipments index increased 1 point to 31.2. The future employment index fell notably, from 14.9 to 8.1. Twenty-four percent of firms expect to increase employment over the next six months; 16 percent expect to decrease it. Note that the future conditions metrics have been consistently more positive than the actual business conditions metrics that followed in subsequent months. This pattern of more optimistic views than conditions actually turned out to be has been in place since 2000. Prior to that, the future and present conditions metrics have been much more closely tied.