The Federal Reserve Bank of Philadelphia’s Business Outlook Survey top-line number improved, but larger weaknesses are still persistent in the underlying details. The composite index of general business conditions improved from -1.9 in August to 5.7 in September. This represents a significant gain from the -16.6 reading in June. However, nearly 23 percent of respondents said that business activity was lower.
Looking more specifically at the various components, manufacturing activity remains weak across-the-board. The index for new orders fell from 1.0 to -0.6 for the month, indicating a slight contraction. Shipments were also modestly lower, even with an improvement in its index from -21.2 to -0.2. In addition, there were fewer employees and a shorter workweek. Almost 22 percent of those taking the survey said that they had reduced employment in the past month, with over two-thirds saying that there was no change.
Forward-looking measures remain positive, but with significant easing from last month. The expected general business activity index for six months from now fell from 41.2 to 21.6. While this still suggests strong growth, its pace has clearly diminished. This weaker pace is seen in indicators for new orders, shipments, hiring, and capital spending. In the case of investment, manufacturers now expect for their capital expenditures to decline over the coming months, with that index dropping from 4.8 to -1.9.
Speaking of the future, the Conference Board’s Leading Economic Index reported an increase of 0.6 percent in September, more than offsetting its 0.4 percent decline in August. The primary driver of this gain was housing permits, which soared last month to 894,000 units. Increased permitting alone accounted for 0.3 percentage points – or half—of the increase. The other positive contributing factors included rising stock prices and improved interest rate and credit conditions.
Manufacturing provided a mixed contribution to the leading indicators, which should not be surprising given recent weaknesses. The measures for new orders from Census and the Institute for Supply Management moved in opposite directions, with the workweek of production workers providing no impact to the impact. Consumer confidence was also a drag on the index.
The Coincident Economic Index, which looks at the current environment, rose 0.2 percent in September, reversing the 0.2 percent decline in August. In contrast to the Leading Economic Index, manufacturing did have a positive role in this month’s gain. The increase in industrial production and higher manufacturing and trade sales were both helpful to recent improvements. Other positive factors were slight gains in nonfarm payrolls and personal income.
Overall, these two measures suggest that recent data have improved conditions in the larger economy, particularly for the housing sector. Where there were steep contractions earlier, these appear to have stabilized and have moved in the right direction, even if growth remains challenged. This is definitely the case with manufacturing, which remains persistently weak. The underlying data from the Philly Fed survey show this, with contractions in sales, production, and employment and reduced expectations for the future.
Hence, one could easily look at this data with a glass-half-full or a glass-half-empty approach. For manufacturers it is a bit of both, with significant headwinds hampering growth both today and in the future.
Chad Moutray is chief economist, National Association of Manufacturers.
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