Manufacturing Weakens in Philly Fed Survey Even While Inflation Gets Stickier

WASHINGTON, DC - FEBRUARY 17: U.S. President Joe Biden waves as he walks towards Marine One prior to a departure for Cleveland, Ohio from the White House on February 17, 2022 in Washington, DC. President Biden predicted the likelihood of a Russian invasion to Ukraine is high and “in a …
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Regional manufacturing weakened more than expected and signal of stubborn inflation rose in February, data from the Federal Reserve Bank of Philadelphia indicated Thursday.

The Philly Fed’s survey of manufacturers’ measure of general business conditions tumbled seven points to a reading of 16 in February, mostly offsetting last month’s increase. Economists had expected a reading of around 20.

Demand weakened more than expected and supply constraints still weigh on business. The measure of new orders fell from 17.9 to 14.2. The measure of shipments declined from 20.8 to 13.4.

Despite the February decline, all three gauges remain in positive territory, indicating that business expanded, albeit at a slower pace.

The New York Fed’s manufacturing survey, released earlier this week, moved slightly higher in February after plunging into negative territory in January. The omicron variant appears to have hit New York manufacturers earlier and harder than factories in other regions. In January, the national ISM factory index fell for the third straight month to its lowest point in 14-months but still remained in expansion territory.

The Washington, D.C.-based Federal Reserve Board’s measure of factory output showed that nationwide manufacturing production grew by 0.2 percent in January after falling by 0.1 percent in December. Automakers, however, slowed production, indicating ongoing supply chain problems.

The slowdown in growth in the manufacturing sector has not yet slowed down inflation. The Philly Fed’s measure of prices received by manufacturers moved up in February. While the metric of prices for raw materials fell, it remains at an extremely high level.

Factories also see more themselves getting squeezed a bit more between wage inflation and resistance by customers to paying more for products. The expected one year ahead wage inflation rose to five percent from 4.8 percent in November 2021, the last time the Philly Fed inquired about year ahead wages. The expected inflation in the prices of goods sold dipped to five percent from 5.3 percent.

Wage inflation is considered “stickier” than prices of goods and services. Employers often hold out against paying higher wages knowing that workers strongly resist wage cuts when economic conditions deteriorate. So price tags get changed faster than paychecks, which can squeeze workers and inflate profits in the short term. When price inflation is matched by wage inflation, they can become self-reinforcing.

Manufacturers said that they have increased their own prices by five percent over the past year and expect consumer prices to rise another five percent this year, a vote of no-confidence in the Fed’s promise to bring inflation down this year and unchanged since November. Over the longer term, however, the Fed’s pivot to inflation-fighting may be having some effect. Manufacturers expect inflation to run at three percent over the long term, down from 3.5 percent last year.


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