Responses to the Nonmanufacturing Business Outlook Survey suggest that regional nonmanufacturing activity improved in May. The firm-level index of general activity, new orders, and sales/revenues rose notably after posting declines in April, and the full-time employment index remained positive. Both price indicators increased from last month. The firms continue to expect growth over the next six months.

Current Indicators Strengthen
The survey’s indicators for current activity suggest continued improvement in the nonmanufacturing sector of the regional economy. The diffusion index for current general activity at the firm level increased 13.5 points to 39.5, its highest reading since June 2015 (see Chart). Nearly 52 percent of the firms reported increases in activity, compared with 12 percent that reported decreases. The regional activity index also increased, rising 18 points to 45.3, its highest reading since June 2015. The indicators for new orders and sales/revenues rose sharply this month, as fewer firms reported decreases in each measure this month than did last month. The new orders index more than recovered from its decline from last month, rising 24 points to 36.2. The share of firms reporting increases in new orders (45 percent) exceeded the share reporting decreases (9 percent). The sales/revenues index increased after two consecutive months of declines, rising from 13.5 in April to 33.7 in May. Almost 49 percent of the firms reported increases in sales/revenues, while 15 percent reported declines.

Employment Conditions Remain Positive
The firms continued to report overall increases in full-time employment, although most firms noted steady employment levels. The full-time employment index decreased from 15.8 in April to 7.7 in May. The share of firms reporting increases in employment (15 percent) exceeded the share reporting decreases (8 percent); a majority (70 percent) reported no change. The part-time employment index increased 3 points to 11.4, and the average workweek index rose 14 points to 26.8. The wages and benefits indicator also increased, rising from 28.3 to 46.4.

Firms Continue to Report Overall Price Increases
The indexes for prices paid for inputs and prices received for firms’ own products and services increased in May after decreasing in April. The prices paid index rose 8 points to 33.8. Nearly 34 percent of the respondents reported increases in input prices, while none of the firms reported decreases. Most firms (58 percent) reported no change in input prices. The prices received index rose from 12.1 in April to 22.6 in May, its highest reading since February 2016. Nearly 24 percent of the firms reported increases in prices received, while only 1 percent reported decreases. Almost 66 percent of the firms reported no change in their own prices.

Firms' Forecasts for Own Prices and Inflation Edge Higher
In this month’s special questions, the firms were asked to forecast the changes in the prices of their own products and services and for U.S. consumers over the next four quarters (see Special Questions). Regarding their own prices, the firms’ median forecast was for an increase of 2.5 percent, up from 2.0 percent when the question was last asked in February. When asked about the rate of inflation for U.S. consumers over the next year, the firms’ median forecast was 3.0 percent, an increase from the previous forecast of 2.0 percent in February. The firms expect their employee compensation costs (wages plus benefits on a per employee basis) to rise 3.0 percent over the next four quarters, the same as the previous forecast. The firms’ forecast for the long-run (10-year) inflation rate decreased from 3.0 percent to 2.5 percent.

Firms Remain Optimistic
The respondents continued to expect growth in nonmanufacturing activity over the next six months. The diffusion index for future activity at the firm level increased from 40.8 to 45.3 (see Chart). Almost 63 percent of the firms expect an increase in activity at their firms over the next six months, compared with 17 percent that expect a decline. The future regional activity index rebounded from its decline last month, rising 9 points to 50.1.

Summary
Results from this month’s Nonmanufacturing Business Outlook Survey suggest improvement in regional nonmanufacturing activity. The indicators for firm-level general activity, sales/revenues, and new orders rose, and the firms continued to report overall increases in full-time employment. The respondents remain optimistic about growth over the next six months.