Expectations Crash In Poor Philly Fed Survey

Strike up the recession band.

Just three days after Empire manufacturing plunged the most since the early days of the pandemic, the Philly Fed gauge printed a large miss.

At 2.6, the headline general business conditions index missed the lowest estimate from 42 economists. It marked the most subdued reading in two years (figure below).

Most firms saw no change in business activity this month.

More notably, the future general activity index sank to 2.5. That doesn’t sound all that remarkable given the comparable print on the headline gauge, until you consider that it represents a 13-year low (figure below).

22% of firms expect a decrease in activity, which was actually down from 29% in April. But 46% now see no change, up sharply from 31%.

Just a quarter of firms expect growth over the next six months. That figure was 29% a month ago.

On the bright side, gauges of new orders and shipments rose, but the employment index dropped sharply (16 points) to 25.5. The future employment index fell 10 points to 29.2. Just a third of firms expect to increase employment.

Worryingly, a gauge of future capex fell to 9.6, the lowest reading in a half-dozen years (figure below).

Both the prices paid and received indexes were elevated, with the former receding six points from a 43-year high in April. More than half of firms reported higher prices for their own goods.

In May’s special questions, firms were asked to update their forecasts for consumer inflation and comp costs. The median forecast for consumer price inflation was 6.5%, up dramatically from 5% in February (figure below).

Projections for firms’ compensation costs were unchanged. You don’t need to be a mathematician to understand that a 5% raise set against a 6.5% increase in consumer prices leaves you 1.5% poorer.

Ultimately, the May vintage of the Philly Fed survey wasn’t encouraging. Although it’d be a stretch to call it a disaster, you’d be hard-pressed to spin it as constructive.

“Firms continued to indicate overall increases in employment and widespread increases in prices paid and received,” the color accompanying the results said. “The survey’s future indexes suggest muted optimism for growth over the next six months.”