Big Inventory Drop Shows Up In Philly Fed Survey

Results of the Philadelphia Fed's Business Outlook Survey were better than expected, although the results remained poor. The survey's index on general business conditions increased to -35.0 from -41.3 in February, which was 4 points better than expected. The index has been between -24.3 (January) and -41.3 (February) over the past six months. Readings below zero indicate that a majority of respondents rated conditions negatively.

A turnaround in factory activity will likely lag stabilization in demand, as factory inventories have increased sharply in recent months.

That said, cutbacks in industrial output have been severe and are now exceeding the decline in demand (the decline in business inventories exceeded the decline in business sales in January); that will reduce inventories faster and hasten stabilization in factory activity. To wit, note that the inventory component within today's release plummeted to a record low of -55.6 from -24.3 in February, breaking the previous low of -50.7 set in March 1975.

In addition to the inventory drawdown, the combination of the TALF, fiscal stimulus and the public-private investment fund (PPIF) will likely underpin demand and make the first quarter the worst for the economic recession.