Mid-Atlantic Manufacturing Collapses

Reuters, 18 Jan 2001

Manufacturing in the highly industrial region surrounding Philadelphia shrank in January to its worst state of decline in more than a decade, the Federal Reserve Bank of Philadelphia said on Thursday.

In a report that jolted financial markets, the Philadelphia Fed said its index of business conditions in the mid-Atlantic region slid ``precipitously'' to -36.8 in January, from -4.2 in December, contracting for the second straight month. It was the index's lowest level since December 1990, and far below the -8.2 economists surveyed by Reuters had expected.

A number below zero indicates contraction and the reading was considerably below that level, indicating widespread and dramatic deterioration in the manufacturing sector, which represents a fifth of the overall economy.

U.S. Treasury bonds, along with the European common currency, surged on the news as market participants bet the weakness in manufacturing will spur aggressive rate cuts by the Federal Reserve by the end of this month.

Michael Trebing, the Philadelphia Fed economist who administers the survey, said in a teleconference with reporters that the January weakness -- the second largest monthly drop ever -- was broad-based and unexpected.

The regional survey also follows five consecutive monthly contractions in the National Association of Purchasing Management (NAPM) index, showing widespread weakness in the across the entire U.S. manufacturing sector.

``We just continue to see one sign after another that indicates that the manufacturing sector has been struggling,'' Norbert Ore, chair of NAPM's manufacturing Business Survey Committee, told Reuters. ``We're now not only seeing it in basic materials manufacturing, but also in the technology area, and it also appears to be moving over into the non-manufacturing sector,'' Ore said.

At a shock intermeeting gathering earlier this month, the Fed cited the protracted slowdown in manufacturing as one of the reasons behind its decision to slash interest rates by half a percentage point. That decision came one day after the weak December NAPM report rocked financial markets. ``The Philly Fed number reinvigorates the view that the Fed will have to cut rates by 50 (basis points) when it meets later this month,'' said Thomas Connor, head of government bond trading at J.P. Morgan Chase.

While the numbers pointed to a dismal month for manufacturing, Trebing added that: ``We have had similar negative readings and declines in these kinds of indexes in the past without a protracted decline in the manufacturing sector.''

The Philadelphia Fed's new orders component also plunged dramatically to -30.9 from a downwardly-revised 4.0 in December, indicating flagging demand and stockpiling inventories.

The prices paid index, a gauge of inflationary pressures, fell to 12.9 from an upwardly-revised 15.8 in the prior month, demonstrating an inability on the part of manufacturers to raise prices. The December prices paid was originally reported at 13.9. The bank also said that nearly 29 percent of firms reported declines in employment during the month, with only 5 percent reporting increases. That sent the employment index tumbling to -23.5, its lowest reading since April 1991.

The Philadelphia Fed added that the outlook for the next six months was also grim, at its worst in more than a decade, ''suggesting that the declines are not expected to be temporary,'' according to the report.

The future index for general activity fell to -16.3 in January, its lowest since September 1990, from a revised -4.2 in December. ``The bottom line is, this is weak, we're probably looking for another decline in the (NAPM), probably through levels that are associated with a recession in the overall economy. And that's it,'' said Brian Jones, economist at Salomon Smith Barney.

The Philadelphia Fed, one of the nation's 12 regional Fed banks, serves the third economic district, encompassing Delaware, eastern Pennsylvania and southern New Jersey.

The Business Outlook Survey is a diffusion index compiled by subtracting the companies reporting decreases from those reporting increases with seasonal adjustment factors applied. Any reading over zero implies growth. The Philadelphia Fed has been conducting its survey each month since May 1968.

-- Andre Weltman (aweltman@state.pa.us), January 18, 2001