Philly Fed Index Continues to Hold Near the Flatline

| October 21, 2010

The Philadelphia Federal Reserve reported its Business Outlook Survey for October, and the diffusion index of current activity moved slightly higher to 1.0 from -0.7 in September, although forward-looking measures continue to signal weak demand.

Results from the Business Outlook Survey suggest that regional manufacturing activity was steady in October. Although the broad survey measures showed marginal improvement this month, the new orders index continued to suggest weak demand for manufactured goods. The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from a reading of –0.7 in September to 1.0 in October. The index had been negative for two consecutive months (see Chart). Indexes for new orders and shipments continued to indicate weakness this month: The new orders index increased 3 points but remained negative for the fourth consecutive month.

Firms reported near steady employment again this month, but lower average work hours for existing employees. The percentage of firms reporting increases in employment (20 percent) narrowly edged out the percentage of firms reporting decreases (17 percent). The index for employment was slightly positive for the second consecutive month but increased just 1 point. Indicative of still weak activity, more firms reported declines in average work hours for existing employees (22 percent) than reported increases (16 percent).

As shown on the following graph from Calculated Risk, the index has been holding near the 0 level following the plunge from recent highs at 20 earlier this year.

It will be important to continue monitoring these data trends closely during the next several months. If the downtrends from earlier this year hold near current levels and do not experience any additional material deterioration, the risk of a return to outright economic contraction in the fourth quarter will decrease, and we will be looking at a very low growth scenario instead.

Category: Commentary, Market Update

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