Philly Fed Manufacturing Index: Overall Decline Continues

This article was originally written by Doug Short. From 2016-2022, it was improved upon and updated by Jill Mislinski. Starting in January 2023, AP Charts pages will be maintained by Jennifer Nash at Advisor Perspectives/VettaFi.

The Philly Fed's Manufacturing Business Outlook Survey is a monthly survey of about 250 manufacturers in the Third Federal Reserve District, which covers eastern Pennsylvania, southern New Jersey, and Delaware. Participants of the survey indicate the relative level of general business conditions in the region. While it focuses exclusively on business in this district, this regional survey gives a reliable direction of the broader Chicago Fed's National Activity Index.

The latest manufacturing index came in at -10.4, up 20.9 from last month, marking the index's ninth negative reading in a row. The six-month outlook was down 8.8 points from last month and remains in negative territory for the third straight month at -10.3. Since this is a diffusion index, negative readings indicate contraction, positive ones indicate expansion.

The -10.4 headline number came in above the -19.8 forecast.

Here is the introduction from the survey:

Manufacturing activity in the region continued to decline overall, according to the firms responding to the May Manufacturing Business Outlook Survey. The survey’s indicators for general activity, new orders, and shipments rose from last month but remained negative. On balance, the firms also reported a decline in employment. The price indexes remained below long-run averages, with the prices received index declining further. The survey’s future indexes continued to reflect muted expectations for growth over the next six months. (Full Report)

The first chart below gives us a look at this diffusion index since 2000, which shows us how it has behaved in proximity to the three 21st century recessions. The green dots show the indicator itself, which is quite noisy, while the purple line represents the three-month moving average, which is more useful as an indicator of coincident economic activity. We can see longer and deeper periods of contraction during each of the recessions with shallower contractions in '02, '03, '11, '12, '13, and '15. Currently, we have been in contraction territory since June 2022 that more closely resembles those periods during recessions.

In the next chart, we see the complete series, which dates from May 1960. For proof of the high volatility of the headline indicator, note that the average absolute monthly change across this data series is 8.1.

The next chart is an overlay of the General Activity Index and the Future General Activity Index — the outlook six months ahead.

Future Indicators Soften

The diffusion index for future general activity declined 9 points to -10.3, the index’s third consecutive negative reading (see Chart). Almost 37 percent of the firms expect a decrease in activity over the next six months, exceeding the 27 percent that expect an increase. The future new orders index fell from 9.8 to -2.3, and the future shipments index declined from 13.3 to 4.5. The firms expect increases in employment overall, as the future employment index rose 9 points to 12.6. Both future price indexes rose but remain below their long-run averages. The future capital expenditures index rose 8 points to 2.5, after negative readings in the prior two months.