Philly Fed index surprises to the downside in February

By Alexander Bueso

Date: Thursday 21 Feb 2019

Philly Fed index surprises to the downside in February

(Sharecast News) - A key gauge of US factory sector activity surprised sharply to the downside in February, although some economists believed the sudden bout of weakness would be short-lived, attributing it to the partial federal government shutdown at the turn of the year and concerns, since allayed, of a repeat.
The Federal Reserve bank of Philadelphia's manufacturing sector index printed at -4.1, versus a consensus forecast for a reading of 14.5.

In January, the closely-followed gauge had stood at 17.0.

Significantly, the sub-index tracking the new orders received by firms in the mid-Atlantic region, slumped from 21.3 to -2.4, pointing to shrinking order books.

Inflation pressures also eased, with the 'prices paid' sub-index retreating from 32.7 to 21.8.

Not surprisingly perhaps, subindices linked to labour conditions, which tend to be backwards looking, fared better.

The sub-index linked to staffing levels rose from 9.6 to 14.5, although that for the length of the average employee workweek slipped from 6.0 to 4.7.

Commenting on Thursday's figures, economists at Barclays Research said: "As a result, we read the sharp drop in February orders and shipments alongside a modest inventory build as likely reflecting the effects of the federal government shutdown, which lasted until the latter stages of January, and the concerns about the budget process that could have led to a second shutdown in February.

"If so, we would expect a rebound in current business conditions in March amid largely stable forward looking assessments."

Their peers at Capital Economics were less upbeat, telling clients they saw scant margin for a recovery in investment growth "any time soon".

To back up their case, they pointed to corporate credit spreads - which remained wider than just a few months ago - alongside tighter standards on business loans and the recent "clear deterioration" in global manufacturing conditions.

"Overall, the durable goods data provide further reason to think that economic growth will soon slow to below its 2% potential pace, which will keep the Fed on hold throughout this year."

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