The Philly Fed, which was expected to rise from the April number of 18.5 to 20, instead collapsed to 3.9! This compares to the March level of over 43. So much for the "Economic Recovery"TM. The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 18.5 in April to 3.9, its lowest reading since last October (see Chart) and the 3rd largest 2 month drop on record. The demand for manufactured goods, as measured by the current new orders index, showed a similar slowing: The index fell 13 points while the shipments index declined 23 points; both remained positive, however, suggesting slight growth last month. For the first time in eight months, firms reported that unfilled orders and delivery times were falling—both indexes were slightly negative this month." And even thought the prices paid dropped from 57.1 to 48.3, this was little solace for survey respondents: "A majority of firms continued to cite input price pressures and a sizable share of firms reported higher prices for their own manufactured goods again this month." Time for Tim Geithner's 2011 NYT OpEd edition, titled appropriately, "Welcome to the Economic Stagflation." And, oh yes, bring on the QE3.
From the report:
The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 18.5 in April to 3.9, its lowest reading since last October (see Chart). The demand for manufactured goods, as measured by the current new orders index, showed a similar slowing: The index fell 13 points while the shipments index declined 23 points; both remained positive, however, suggesting slight growth last month. For the first time in eight months, firms reported that unfilled orders and delivery times were falling—both indexes were slightly negative this month.
Firms’ responses continue to indicate overall improvement in the labor market despite weaker activity, orders, and shipments. The current employment index increased nearly 10 points and has now remained positive for eight consecutive months. The percentage of firms reporting an increase in employment (32 percent) is higher than the percentage reporting a decline (10 percent). Only slightly more firms reported a longer workweek (17 percent) than reported a shorter one (13 percent) and the workweek index decreased 14 points.
And some "expert" views on this collapse per Reuters:
ERIC GREEN, CHIEF ECONOMIST AND HEAD OF RATES STRATEGY, TD SECURITIES, NEW YORK
"It's pretty ugly. The Philly Fed index was a lot weaker than expected. New orders, shipments, unfilled orders, inventory, delivery time, all down quite sharply. Employees were up smartly, which is good, but the average work week was down. So you still had growth over the month but that growth has slowed pretty sharply, and that's also been reflected in the six month outlook.
"We are seeing some of the knock-on effects of what happened in March and April, which was the residual affect of the Japan earthquake hitting the production numbers, the big run-up in energy prices, and you're also seeing a bit of a soft patch given you're getting a rollover in inventory momentum."
"I'm not overly concerned because I think this gives way in the next couple of months. You've had a pretty smart drop in energy pieces and that has a pretty big effect on the Empire and Philly Fed survey given the mix of chemical industries and things of that nature. Also two sources of demand that will continue to drive manufacturing are exports and capital spending, which are looking very strong. I think this is a soft patch, but no more than that. I fully expect this to move the other way."
KATHY LIEN, DIRECTOR OF CURRENCY RESEARCH, GFT, NEW YORK
"All the numbers that we just saw were extremely, extremely bad. Any relief or optimism that investors may have had after the jobless claims report has now been erased. All of these numbers confirm that the U.S. recovery is moving at a glacial pace and the Federal Reserve really has no choice but to take a back seat with monetary policy and wait for the economy to gain momentum. This also shows that even though the Federal Reserve is talking about exit strategies, they are not ready to implement them. The latest reports just confirm that the U.S. economy is not at the right point for (Ben) Bernanke to follow the footsteps of (ECB head Jean-Claude) Trichet."
RUDY NARVAS, SENIOR ECONOMIST, SOCIETE GENERALE, NEW YORK:
The Philly Fed was a weak report across the board. Unlike the Empire report where they underlying looked pretty good, the underlying of the Philly Fed looked pretty soft.
"The housing data was weaker than expected. The housing market is still really going nowhere.
"The second quarter, especially April and perhaps May as well, is going to be marked by parts shortages from Japan. That hit the industrial production data last week and that was all due to autos. Whether (the Philly Fed weakness) is due to that is unknown. You could see a second quarter that was weaker than we were expecting but at the same time the third quarter, which was supposed to be softer than Q2, may come out firmer as those auto plants get back to full speed."
TOM PORCELLI, U.S. ECONOMIST, RBC CAPITAL MARKETS, NEW YORK
"It was, I think, in a word, pretty ugly. It wasn't just the headline but it was basically the data beneath the surface. New orders, shipments, they both fell pretty sharply. The lone positive was the employment index but if you're looking at the more forward looking index, new orders, they basically got annihilated.
"We're probably past the peak in regard to manufacturing activity, but we don't think manufacturing activity is stopping. We just think it is slowing a bit.
"This in no way suggests to us that we should expect manufacturing activity will cease to be an engine of growth in the recovery, we just think it's going to be less powerful.
"The regional manufacturing reports are sometimes prone to volatility and you looked at what happened earlier in the week with Empire, Empire wasn't as bad as it first looked. You have to take Philly Fed in the context of what are the other regional indexes telling you."