Bad Weather spoiled the Data in February

In my posts, I often return to the U.S. regional Purchasing Managers indices. The Federal Reserve Bank (FRB) of Philadelphia published the Manufacturing PMI for the Mid-Atlantic coast of the United States. Negative index results indicate a decline in manufacturing activity, while positive data would indicate growth.

In the midst of the global financial and economic crisis in February 2009, Philadelphia Fed PMI fell to -41.3. Then the indicator began to strengthen to the high at 43.40 (March 2011), which wasn’t reached since that time. The second fall to -30.7 could be seen in August 2011. Then the uptrend continued. However, Philly Fed Manufacturing PMI failed to move above 22.30 so far (the level reached last September).

The index released last week (on Thursday, February 20) came out at -6.3 – the minimum since last February. This is the first drop of Philadelphia PMI below zero since last May.

Technically, the index fall in February looks like breaching the support level of the bullish trend of 2011-2013. It is disappointing, but not disastrous, as the support level of a larger positive trend (of 2009-2013) remains intact. Now it holds at around -20 points, while the fall in the index can be considered as an attempt to adjust towards the support level (to rebound from this level and resume the growth towards new highs).

Now, let’s look inside Philly Fed Manufacturing PMI and pay attention to its main components. We can compare the data for February, January (the previous month), and October, when the U.S. avoided technical default. Please see the table below.

This table indicates that during four months, the index and its components, like PPI Input and PPI Output, were gradually declining into negative territory.

How can we interpret these results and how can they influence the prospects of the Fed’s monetary policy? Does it indicate that Philly Fed Manufacturing PMI falls and that the U.S. economy is losing the growth impulse? Can negative figures postpone the end of QE3? On answering these questions, I will highlight a few points:

• First, the Philadelphia Fed explains negative data by “severe winter weather during the survey period.” This statement warns against excessive dramatization regarding weak figures. Who but the report authors can know the impact factors?
• Second, the major Fed sub-indices remained positive, despite the overall decline. These are the Employment Level and the prices. This indicates that inflation and employment continued to grow in February, yet a bit slowly, compared to October and January.
• Third, the PPI Output didn’t fall below zero in February and even managed to strengthen. The manufacturers are trying to raise the wholesale prices that should increase consumer inflation, which warns the Fed.

Thus, weak February report is unlikely to assure the U.S. Federal Reserve to postpone trimming QE3. Of course, this won’t change the hawkish sentiment of Charles Plosser, the president of the Federal Reserve Bank of Philadelphia. Judging by their statements, the FOMC members prefer to focus on the drop in the unemployment rate and explain a slowed employment growth by the weather factor. This was recently mentioned by the President of the Federal Reserve Bank of St. Louis, James Bullard, who stated that the unemployment rate is still “a good indicator of overall labor market health.”

The U.S. unemployment rate came close to the key level of 6.5%. Trimming QE3 should continue. This means that the current weakness of the greenback may not last for long.

Source: Forex4you