Philadelphia Fed Report Shows Manufacturing Drop

Regional manufacturing report by the Federal Reserve Bank of Philadelphia showed a slower pace of growth in October and prices continuing to head higher.

NEW YORK (Dow Jones/AP) — A closely watched manufacturing report released Thursday showed a slower pace of growth in October and prices continuing to head higher.
The regional manufacturing report, issued by the Federal Reserve Bank of Philadelphia, is often viewed as a predictor of other factory reports. October's report — while not too far off expectations — still puts investors on edge that the summer's turmoil in financial markets and continued housing troubles may be affecting the broader economy more than was originally feared.
The manufacturing report covers eastern Pennsylvania, southern New Jersey and Delaware.
If the data leading up to the Fed's two-day Oct. 30 rate-setting meeting continue to show slower growth, investors are likely to expect that another cut may be in the cards.
Last month, the Fed reduced its federal funds rate by a hefty half-percentage point to 4.75 percent. Investor expectations for a subsequent October cut have fluctuated, but following the week's particularly soft housing numbers and Thursday's jobless claims, market participants have grown more sure of an impending rate cut.
In Thursday's report, the bank said its general business conditions index for October moved to 6.8 from a 10.9 reading in September and 0.0 in August. Readings over zero indicate growth, while those under that level point to contraction. Economists had expected a 7.5 reading for October.
The bank said inflationary forces faced by Philadelphia-area factories continued to rise, with the prices paid index coming in at 40.3 for October, from September's 23.1 and 15.4 in August, and the prices received index hit 12.4 from 3.3 last month.
''Comments from respondents indicated that higher energy prices were a big part of high prices paid,'' said Mike Trebing, senior economic analyst at the Philadelphia Fed. ''They also noted increases in other input prices, particularly grains and imports.''
The report showed that the October new orders index stood at 2.7 from September's 15.1, while the shipments index was negative 4.1, after standing at 16.9 in September. Meanwhile, the employment index for the current month was more robust at 12.6 from 7.5.
Trebing said ''the decline in shipments and the increase in the employment reading would be consistent with a negative productivity reading.'' Shipments are typically a proxy for production, with lower production and higher employment suggesting a decline in productivity. But ''you can't make inferences about productivity from diffusion indexes,'' Trebing said. Still, a sharp run-up in prices did occur.
While most current indicators ''suggest slower growth,'' according to the report, ''expectations for manufacturing growth over the next six months showed some improvement.''
''The outlook for six months forward is rather robust compared with assessment of the present situation,'' Trebing said.
In a special question in the survey, firms were asked if recent changes in financial conditions had influenced planned spending on new plants and equipment over the next six to 12 months, relative to the past six to 12 months. While two-thirds of the firms indicated no revisions in plans, 12 percent reported a substantial downward revision in planned spending, 13 percent indicated a small downward revision, and 1 percent expected substantial upward revision.
The Philadelphia Fed index components are often weighted and combined to proxy the Institute for Supply Management's manufacturing index. The October survey yields a weak reading of 49.9 on that basis, compared with 55.0 in September and the actual ISM index reading of 52.0 for September. That suggests a pronounced weakening and would be read as a negative on the ISM basis.
The ISM manufacturing index for October is scheduled to be reported on Nov. 1.
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