Dear Philly Fed, Is Business Really Dying?

If you have gone through earnings season and listened to conference calls and read through conference call transcripts in the manner we have and compared the corporate outlooks to economic data, then you will probably agree that the recovery is slowing and slowing rapidly.  Where it gets interesting though in negative economic numbers is that manufacturers are still seeing some growth in their comments.  But when you see negative regional manufacturing and business conditions data coming into play already and when you see a 500,000 weak of jobless claims, then the answer is hard to find.  Someone has to be lying.

The Federal Reserve’s Philly Fed business index tanked at the same time that leading economic indicators (which are technically not that leading) rose less than expected.  The Philly Fed index came in at a reading of -7.7.  Dow Jones and Bloomberg were both expecting positive readings of 7.0.  The number was worse than all economists polled.  July was 5,1 in July.  The prices paid index component fell 1 point to 11.8.

Indexes for new orders and shipments also suggest a slowing as new orders index fell to -7.1 as shipments fell to -4.5; and both delivery times and unfilled orders remained negative this month.  The percentage of firms reporting a decline in employment was 23% versus only 20% reporting an increase.  There was also a real drop off in the average work week as well.  More firms reported decreases in prices at 19% versus just 6% that saw increases in the prices.

The hope has to be in the outlook.  Maybe factories were kept at low levels during the summer lull.  The future general activity index remained positive for the 20th consecutive month, albeit at weaker levels. The future new orders index increased to 25.7.  The outlook for employment is weakening: The percentage of firms expecting employment to decrease over the next six months was 22% versus those expecting increases at 21%.

Here is the issue to consider.  Who is lying?  Someone is lying.  Maybe everyone.  The Philadelphia Federal Reserve Bank serves eastern Pennsylvania, southern New Jersey, and Delaware.  The survey results reflect data received through August 16, 2010 and is weaker than the Empire State report.  Either the business conditions fell off the cliff in the last week, or Philly is just not as representative of conditions in corporate America.

It is still about two weeks out before we get to see Chicago Purchasing Managers, ISM Manufacturing, Midwest Manufacturing, Construction Spending, Factory Orders, and more.

JON C. OGG