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An Ominous Philly Fed

08/18/2011
On Thursday morning, August 18, the Philly Fed Index was reported at -30.7 versus consensus estimates of -2.0 to +1.5.
 
The sharp contraction presents a rather ominous outlook for U.S. growth over the next three months. In fact, I would categorize this report as one of the most concerning economic data points this summer. There is a high correlation between contractions greater than -25 and the occurrence of a recession.
 
Since this is the first I have blogged about a Philly Fed figure, let me draw a comparison. This morning's drop is analogous to an ISM Manufacturing reading in the low to mid 40's. 
 
 Inside the Philly Fed Report
• New orders contracted to -26.8, the lowest reading since March 2009.
• Shipments fell to -13.9, the lowest reading since May 2009.
• Prices paid fell to +12.8, from +25.1 last month.
• Prices received fell to -9, from +1.1 last month.
• The employment index fell to -5.2, the lowest reading since October 2009.
 
 
COMMENTARY: I expect the result of this Philly Fed report will be limited upside potential for the S&P 500® Index beyond the August 17 high of 1208.47. The recovery momentum of the last week has stalled. The September releases of ISM Manufacturing and the U.S. jobs report loom large and may answer the obvious question, "Are we heading into another recession?" I still do not believe we are. 
 
PORTFOLIO STRATEGY: Please reread my August 3 blog, 'K.I.S.S. = Corporate Bonds." Corporate bonds, in particular investment grade, remain an asset where Investors can easily identify the "confidence story."
 
 
PHILLY FED, 8/31/70 TO 8/31/11

Source: Bloomberg

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