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Why the Federal Manufacturing Index Fell in October

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Philadelphia Fed Manufacturing Index fell to -4.5% in October

With new orders and shipments indexes turning negative, the Philadelphia Fed Manufacturing Index came in at -4.5 points in October, compared to -6.0 points in September 2015. With manufacturing conditions continuing to remain weak, the Industrial Select Sector SPDR Fund (XLI) has fallen by 6.7% year-to-date, or YTD, as of October 15. The exchange traded fund was up 2.6% from a year ago. Meanwhile, industrial conglomerates Danaher (DHR) and Roper Technologies (ROP) gained 19.1 and 20.9%, respectively, over the same period.

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New orders and shipments turning negative in October

The indexes for new orders and shipments have fallen below zero, marking the first negative reading since May 2013. The indexes for new orders and shipments fell to -10.6 and -6.1, respectively, in October. Falling new orders suggest that demand conditions are weakening in the economy.

The fact that unfilled orders and delivery time fell to -11.7 and -1.2 implies that production capacity is remaining underused with a falling order book. Since the industry is running with overcapacity, the expected capital spending has also significantly fallen to 7.2 in October, compared to 27.2 in September 2015. As of October 15, electrical equipment companies Emerson Electric (EMR) and Eaton Corporation (ETN) fell by 23.5% and 15.2%, respectively, for the last 12 months.

Falling manufacturing is likely to impact the employment opportunities in the economy. With a sluggish growth outlook, index for the number of employees fell to -1.7 in October, this was from 10.2 points in September 2015. Manufacturers are unlikely to hire employees if there exists a lack of confidence in the business outlook. Similarly, companies will restrict their capital spending with the weak business environment.

Let’s take a look how the fragile manufacturing environment is impacting jobless claims in the next article.

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