Fed Survey points to slowdown in July

The Philadelphia Fed’s general business conditions index was weaker than forecasts, declining to 5.1 in July from 8.0 in June. The details of the report corroborated the slowing in manufacturing growth suggested by the headline index (unlike the national ISM manufacturing survey, the headline index in this report is a general sentiment indicator, not a composite of the subindexes on orders, employment, shipments, etc.)—in ISM terms, the Philly Fed index was 50.0 in July versus 53.3 in June.


The early manufacturing surveys for July and the Fed’s industrial production data for June point to a downshift in what has been, until now, a very rapid growth rate in manufacturing activity. The Philly Fed survey was particularly disappointing since it pointed to declining order books and, in ISM-weighted terms, it indicates flat activity in the month. It is early days to project the overall ISM manufacturing index for July but today’s surveys suggest that the ISM manufacturing index might drop by around three points in July from 56.2 in June. The slowing in manufacturing is clear, what is not clear is the cause. We think that it reflects declining impetus to activity from the inventory cycle and we are encouraged by continued signs of rapid global trade growth and strength in indicators of capital goods spending. We think that manufacturing will still continue to expand at a solid pace in the second half of the year but the recent data have put us a little on the back foot in holding to this view.


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