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Very Negative Philly Fed May Be Due to Sentiment and Market Noise

The Federal Reserve Bank of Philadelphia has released its monthly Manufacturing Business Outlook Survey for the month of September. While the headline is negative, and while it was way short of estimates, the overall tone of the report is mixed.

September’s Philly Fed report was not as bad as the Empire Manufacturing report from the New York Fed, but this was the first negative regional reading (at -6.0) in well over a year. Bloomberg had the consensus estimate at a positive reading of 6.3, and all economists in the Econoday pool were positive, with a range of 2.5 to 10.5. The August report was positive at 8.3.

Investors know that the Philly Fed is the last real-time economic report ahead of the Federal Open Market Committee (FOMC) decision on interest rates Thursday around 2:00 pm Eastern Time. That being said, the FOMC members would have had access to this report ahead of time.

Despite much negativity, the overall view from the Fed was that the report is very mixed. The indicator for general activity fell into negative territory, but the Fed’s components in new orders, shipments and employment all remained positive in September. Thursday’s Fed report said:

Evidence suggests that the responses regarding general activity that were received earlier in the month may have been negatively affected by the volatility in the stock market and international news reports. Firms reported essentially unchanged prices for raw materials and other inputs in September and slight declines in prices for their own products. The survey’s indicators of future activity remained near their readings in August, indicating that firms expect a continuation of growth in the manufacturing sector over the next six months.

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Indicators were mixed in September as follows:

  • The diffusion index of current activity (the main report) decreased from 8.3 in August to -6.0 this month.
  • New orders index increased from 5.8 to 9.4.
  • Current shipments index remained positive but fell two points to 14.8.
  • Firms’ responses suggest some improvement in employment conditions in September, despite the reported lull in overall activity.
  • The percentage of firms reporting an increase in employees in September (21%) was higher than the percentage reporting a decrease (11%).
  • The current employment index increased five points, its highest reading in five months.
  • Firms also reported a modest increase in the workweek similar to August.
  • The percentage of firms reporting price increases (16%) was nearly offset by the percent reporting price reductions (15%).
  • Roughly two-thirds of the firms reported steady input prices this month.
    The prices paid diffusion index fell six points to 0.5, its lowest reading in four months.
  • Prices received for manufactured goods, the percentage of firms reporting lower prices (17%) exceeded the percentage reporting higher prices (12%) for the second consecutive month. The prices received index was virtually unchanged from August at -5.0.

While the report was very negative, it seems that the local theme of the Fed was that this report was due to an enhanced fear from the markets. So, this is just one less feather in Janet Yellen’s cap to raise interest rates.

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By Jon C. Ogg


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