Philly Fed Index Indicates First Contraction Since May 2020

Manufacturing activity in the Philadelphia region saw a modest contraction in the month of June, according to a report released by the Federal Reserve Bank of Philadelphia on Thursday.

The Philly Fed said its current general activity index dropped to a negative 3.3 in June from a positive 2.6 in May. The negative reading indicates the first contraction in regional manufacturing activity since May of 2020.

The decrease came as a surprise to economists, who had expected the current general activity index to rise to a positive 5.5.

The unexpected decline by the headline index came as the new orders index plummeted to a negative 12.4 in June from a positive 22.1 in May.

The shipments index also plunged to 10.8 in June from 35.3 in May, indicating a substantial slowdown in the pace of growth.

On the other hand, the number of employees index rose to 28.1 in June from 25.5 in May, suggesting a continued increase in employment.

The report also show decreases by both the price paid and prices received indexes, although they remained elevated.

Looking ahead, the Philly Fed said expectations for growth over the next six months deteriorated, with the diffusion index for future general activity slumping to a negative 6.8 in June from a positive 2.5 in May. The index turned negative for the first time since December 2008.

“Slower manufacturing growth shouldn’t come as a surprise as services spending takes the baton from goods, but the pace at which some of the recent data point to a slowdown is concerning,” said Oren Klachkin, Lead U.S. Economist at Oxford Economics.

“Overall, we believe the fundamental backdrop will support additional manufacturing gains in the month ahead, though there’s a non-negligible risk that growth could stumble,” he added. “The window for avoiding a recession is narrower today, but a downturn isn’t unavoidable.”

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