U.S. Philly Fed Index Surprises to Upside in March

The Federal Reserve Bank of Philadelphia's Manufacturing Business Conditions Index surprised market expectations in March, rebounding to 27.4, its highest reading in four months, from 16.0 in February. The Action Economics Forecast Survey looked for an unchanged reading of 16.0. The percentage of firms reporting improved conditions jumped up to 40.2%, the highest reading in four months, from 26.3% in February, while the share reporting weaker conditions increased to 12.7% from 10.3%. Responses to this month's survey were collected from March 7 through March 14, that is, after the Russian invasion of Ukraine.

The headline index reflects responses to a single question. Haver Analytics calculates an ISM-Adjusted General Business Conditions Index from five key components using the same methodology as the national ISM index. That figure rose to 61.4 in March from 58.5 in February, indicating a rather broadly based improvement in March.

Performance of the subindexes was almost universally stronger this month. The new orders index rose to 25.8 from 14.2 in February. The shipments index jumped up to 30.4 from 13.4 in February. The delivery times index soared to 39.7, its highest reading since May 2021, after having declined in each of the preceding three months. Nearly 46% of respondents reported longer delivery ties, up from 33% in February, while only 6% reported shorter delivery times, down from 10% in February. Inventories was the only subindex to decline in March, falling to 0.5 from 4.0 in February.

The employment subindexes pointed to further strengthening of labor-market conditions. The number of employees index rose to a new record of 38.9 from 32.3 in February The average workweek reading jumped up to 21.4 from 10.8 in February.

Inflation pressures also remained intact. The prices paid reading jumped up to 81.0 in March, the highest reading since June 1979, from 69.3 in February. Just over 87% of respondents reported paying higher prices for inputs while only 6.2% reported paying lower prices. These higher input prices are being passed through to higher output prices. The prices received index increased to 54.4 in March, the second highest reading since the mid-1970s, from 49.8 in February.

The Philadelphia Fed also surveys expectations for business activity in the coming six months. In contrast to the increase in the current conditions index, the expectations index for future activity eased to 22.7 in March from 28.1 in February. The decline in March was led by expected weaker new orders and shipments. Delivery times are expected to shorten while input prices are expected to continue to rise markedly.

In special questions asked in this survey, problems in energy markets and with supply chains replaced Covid as the major factors expected to restrain production over the coming three months.

The survey panel consists of 150 manufacturing companies in the third Federal Reserve District (which consists of southeastern Pennsylvania, southern New Jersey and Delaware). The diffusion indexes represent the percentage of respondents indicating an increase minus the percentage indicating a decrease in activity. The ISM-adjusted figure, calculated by Haver Analytics, is the average of five diffusion indexes: new orders, shipments, employment, delivery times and inventories with equal weights (20% each). Each ISM-adjusted index is the sum of the percent responding "higher" and one-half of the percent responding "no change."

The figures from the Philadelphia Federal Reserve dating back to 1968 can be found in Haver's SURVEYS database. The expectation from the Action Economics Forecast Survey is available in AS1REPNA.