Philly Fed worries the market
2min read The December Philadelphia Fed hit the wires this morning. The news comes following a Fed decision that has taken some of the froth out of markets. The central bank has pivoted to a wait and see approach in the near term. It will be closely watching data as it roll sout and a forward looking instrument like the Philly Fed will be important. The news provided by the December survey was mixed which will raise some red flags in the market as participants may view the Fed as falling behind the curve in its rate cut plans.
Manufacturing Activity Declines Further
The December Philadelphia Fed Manufacturing Business Outlook Survey revealed a further decline in regional manufacturing activity, with the current general activity index dropping to -16.4, its lowest level since April 2023. This marked a significant deterioration from November’s -5.5 reading. Contributing to this decline were negative readings in new orders (-4.3) and shipments (-1.9), highlighting weakening demand. Employment continued to grow marginally, with the employment index falling slightly to 6.6, indicating a more cautious approach to hiring amidst the challenging environment.
Inflation Pressures Persist
Price indicators presented a mixed picture, with the prices paid index rising to 31.2, reflecting higher input costs driven by labor and raw materials. Conversely, the prices received index declined for the third consecutive month to 7.3, signaling limited pricing power for manufacturers. The combination of persistent input cost inflation and declining output prices points to margin compression, further complicating the outlook for the manufacturing sector.
Forward-Looking Indicators Show Softening Sentiment
Future sentiment weakened, as the diffusion index for future general activity fell sharply to 30.7 from 56.6 in November. Firms’ expectations for new orders and shipments also declined but remained above historical averages. While companies still anticipate modest employment growth in the next six months, the future employment index fell to 32.1, reflecting cautious optimism tempered by economic uncertainties.
Production and Capacity Utilization Insights
Special questions in the survey revealed that 50% of firms experienced a decline in production during Q4 2024 compared to Q3, while only 30% reported increases. Median capacity utilization held steady at 70%-80%, though constraints such as labor shortages and supply chain issues persisted. Notably, 17% of firms expect supply chain impacts to worsen in the coming months, up from 9% in September, indicating lingering disruptions.
Comparison to the NY Empire Survey and Fed Sensitivity
The weak results from the Philadelphia Fed survey follow a similarly disappointing NY Empire State Manufacturing Survey, underscoring a broad-based slowdown in U.S. manufacturing. These surveys come on the heels of the Fed’s hawkish shift, which reduced the projected rate cuts for 2025 to just 50 basis points. The juxtaposition of declining manufacturing sentiment and restrictive monetary policy could stoke fears of stagflation, as markets grapple with the Fed’s commitment to controlling inflation despite signs of economic cooling.
Market Implications of Weak Sentiment
The deterioration in forward-looking indicators, coupled with the Fed’s reduced flexibility for rate cuts, has heightened market sensitivity. A weaker sentiment survey like this one could exacerbate concerns about the Fed’s policy missteps. With firms bracing for lower production and capacity utilization constraints persisting, equity markets may face increased volatility, particularly in rate-sensitive sectors.
Key Risks to Monitor
Investors will closely watch inflation trends in manufacturing inputs, as the divergence between rising input costs and stagnant output prices could signal broader economic pressures. Labor market conditions, capacity utilization, and supply chain disruptions will also remain critical indicators for understanding the sector’s trajectory. Additionally, the broader implications of weakened manufacturing activity on GDP growth and corporate earnings will come into sharper focus.
Conclusion
The December Philadelphia Fed survey paints a concerning picture of regional manufacturing activity, with declining demand, rising input costs, and softening sentiment for the months ahead. As the Fed’s hawkish stance on rate cuts limits monetary easing options, markets are likely to remain cautious. The combination of weaker manufacturing data and heightened Fed sensitivity could contribute to increased uncertainty as the economy heads into 2025.
