The Philly Fed is a leading economic indicator, which gives us an idea of what direction the region, and by extension, the country, is going.
The Philly Fed, technically called The Manufacturing Business Outlook Survey, is a monthly survey of manufacturers in the Third Federal Reserve District.
The Third Federal Reserve District covers the state of Delaware, nine counties in southern New Jersey, and 48 counties in the eastern two-thirds of Pennsylvania.
Participants indicate the direction of change in overall business activity and the various activity measures at their plants: employment, working hours, new and unfilled orders, shipments, inventories, delivery times, prices paid, and prices received.
The survey has been conducted each month since May 1968.
How Do We Interpret It?
When the Philly Fed is above zero, it indicates factory-sector growth. When it’s below zero, it implies contraction.
What’s the Overall Outlook?
The summary index missed estimates and came in at 17.6 instead of the expected consensus of 21.4. It’s still technically in expansion territory.
But the pressure to the downside is mounting, driven by inflationary pressures and softening expectations.
As companies become more concerned about the future- they will quickly adjust their spending, investment, and hiring to ensure there are enough cash reserves to make it through the “lean periods.”
After the summary number, we look at three leading indicators: Prices Paid, Business Activity, and Expected New Orders.
Prices Paid
Prices paid is best defined as costs to the company.
How much did you spend on raw materials?
Are the prices rising or falling?
What did it cost for electricity, labor, and other factory gate prices?
When a company sets its price for consumers, it looks at the cost of making or assembling the product, figures out its margin, and gets what the price will be on the shelf.
Prices paid is a LEADING indicator for the CPI (Consumer Price Index) and helps define where inflation will be over the coming few months.
It is breaking out higher to a new record, just as we get renewed supply chain issues and broad logistical nightmares created by trucking and China lockdowns.
Companies will try to pass through as much of this new cost as possible – until the consumer rejects the price increases.
A consumer can either reduce total quantities due to price, find a replacement product, or not buy anything.
As this occurs, companies are forced to reduce their margin and keep prices reduced, hoping to at least cover costs.
This is when the pain really bleeds into the economy… and we are getting there.
Six Month Outlook: Business Activity
Confirmation of that view comes in the 6-month outlook of business activity.
What do they expect their activity to be?
You won’t be surprised to know they expect a lot of pain ahead and will be hiring, constructing their inventory, and operating their business along that line.
It’s a pretty staggering dip from the previous highs.
New Orders
The last one that helps dictate hiring and what needs to be purchased for inventory is new orders.
New orders are getting crushed as consumers and businesses pull back on spending.
Again, we’re above zero, but not by much!
Wrap Up
The Philly Fed is a great leading economic indicator.
If it stays above zero, we’re growing. If not, we’re shrinking.
Right now, we seem to be on the precipice of a contraction.
Thanks to Biden’s inflation, prices paid are up, while business activity and new orders are getting hammered.
Things don’t look great, so invest accordingly.
Until next time,
Freedom Financial News
