Even before the latest reporting of the Philadelphia Fed’s Business Outlook Survey, indicators of the manu- facturing sector had been flashing red. But in case you hadn’t noticed, the folks in Philadelphia got right up in our face this month with a reading for the region’s business activity that screams trouble. However, due to the extraordinary events that surrounded the period of survey, within which investors contemplated a nascent downgrade of American credit, the great depths of despair reflected this August may prove disproportionate to reality.
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The Philadelphia Federal Reserve Bank’s broadest measure of manufacturing conditions is its Diffusion Index of Current Activity. This month, it reached a depth last seen in March of 2009, when stocks bottomed out under a blanket of chaos and concern. The measure sank to negative 30.7 in August, deeply down from the positive 3.2 reading in July. But what do you expect when you survey businessmen between August 8 and 16, the first week following S&P’s downgrading of the United States’ sovereign debt rating. At that time, it appeared to most that Pandora’s Box had been opened, and global economic disintegration would result.
But businessmen were already on edge, as reflected by the Philly Fed’s July reading only slightly above break-even. Indeed, the ISM’s national measure of the manufacturing sector was also near indicating recession at last check. Released on August 1, ISM’s index flirted with it, touching 50.9, where a reading of below 50 would officially sound the alarm.
Generally, it appears that either all business activity froze the week of the Philly survey out of sheer panic or we are very clearly entering recession… or both. Respondents indicated that new orders dropped off sharply, with the New Order Index falling 27 points. Current shipments dropped as well, with the index measuring the activity falling 18 points. What’s more, the indexes for inventories, unfilled orders and delivery times were all in negative territory.
While we would expect employment to lag other indicators, considering that this month’s drop-off follows a trend of growth deceleration, what we discovered about employment in the manufacturing space is no surprise. While 18% of firms surveyed said they had increased their worker count this month, 23% said they had made cuts. The workweek index fell 9 points as well, but many factories shut down for maintenance work during the summer. Indeed, some 29% of the firms surveyed had scheduled summer month shutdowns this year.
The only good result of slowing business activity is a commensurate easing of pricing pressures, and the Philadelphia area respondents concurred. They saw prices paid ease, but prices received also declined. The Philly Fed remained relatively positive on the future outlook, but that was only because readings stayed in positive territory with that regard; they still dropped precipitously. To be precise, the measure of future activity, measuring expectations for the next six months, fell 22 points.
In general, the Philly Fed reports that they see a sharp decrease in demand for manufactured goods. However, the real question to ask is, how acutely did broad concern about the US debt downgrade affect the responses of survey respondents? I think we can expect that the chaos and concern that have characterized the last week and a half across the stock market have affected the mentality of all Americans and driven a shutdown of business activity in August. We’ve seen this reflected in stock prices, consumer sentiment measures and now in this survey of purchasing managers. This shutdown, following a freezing in July on the political wrangling around the debt ceiling issue, seems capable of driving the third quarter of 2011 into recessionary territory, in my view. So let’s all thank Washington and Wall Street (S&P), for once again being at the core of all that ills us.
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