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The Philadelphia Federal Reserve manufacturing index dropped 10 points in December, failing to meet expectations and falling to a six-month low. Now at 0.3, the index is just barely showing growth in the sector, with any reading below 0 indicating contraction.

Key Takeaways

• The Philly Fed manufacturing index fell from 10.4 to 0.3 vs. 8 expected.
• The big miss on the index reveals weaker than expected manufacturing activity which is still suffering from the 17-month long trade war with China.
• While the headline result is down, new orders and shipments rose in December compared to November.

Economic activity in Philadelphia’s manufacturing sector took a downturn in many components this month, with decline in general activity and employment in particular. All components remained in positive territory for the month. 29% of firms reported decreases, while an equal number reported increases. The index for new orders rose 1 point, and shipments rose 6 points. The unfilled orders and delivery times indices revealed an increase in the number of unfilled orders along with slower delivery times overall.

The employment index fell 4 points to 17.8, but the index report made a note that manufacturers continued to expand reporting in December with 19% of firms reporting higher employment and 1% of firms reporting lower employment. The average workweek ticked upward by 2 points. Prices paid rose 11 points to 19.0, and current prices fell slightly. 80% of firms reported no change in the prices of their own products.

@philadelphiafed reported that regional #manufacturing #activity was flat this month, although new #orders, #shipments, and #employment remained at high positive readings. The future #business activity index remained positive, suggesting further optimism for the next six months. pic.twitter.com/XUysjHXynr

— Dr Thomas Kevin Swift (@DrTKSwift) December 19, 2019

In terms of sentiment, firms remain optimistic. The diffusion index for future general activity dipped 1 point to 35.2, with 43% of firms expecting increased activity vs. 8% expecting reduced activity. Future new orders fell 5 points and future shipments fell 2 points. Future employment rose 5 points, and firms were more optimistic about capital spending with an 8 point increase in future spending.

Trade War

The US manufacturing sector, which accounts for 11% of all US economic activity, has softened significantly as a result of the trade war with China which has been ongoing for well over a year. With tariffs put in place on both sides, the primary trading partner for the US has been buying less US goods and vice versa. Manufacturing has suffered from a lack of raw materials typically purchased from China, or from the increase in prices due to tariffs.

Last Friday, it was announced that both nations had entered a preliminary deal arrangement called “Phase One” in which China will buy more US agricultural produce while the US will reduce tariffs on Chinese goods. The Phase One deal may lead to a gradual de-escalation of the ongoing trade conflict.

Expert Outlook

"The diffusion index for current general activity fell 10 points this month to 0.3, its lowest reading in six months," the press release stated  "Although they all remained positive, the indicators for general activity and employment declined, while the indicators for new orders and shipments edged higher. The survey’s future indexes indicate that respondents continue to expect growth over the next six months."

Market Reaction

Gold prices have traded higher following the release of the report. Spot gold last traded at $1,476.85, up 0.29% with a high of $1,478.14/oz and a low of $1,473.45. Gold prices have ticked upward higher following the news that manufacturing activity remains soft along with a report indicating a miss on jobless claims released on Thursday morning.