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Philadelphia Fed Outlook Reported Activity Picks Up in September
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Results from the Manufacturing Business Outlook Survey suggest that regional manufacturing conditions continued to improve in September. Indicators for general activity and new orders were positive and increased from their readings last month. Indicators for shipments and employment, however, were negative, suggesting weaker performance for the sector. Firms remain optimistic about growth over the next six months and were more positive about increasing employment.
Activity Picks Up, but Employment Still Weak
The index for current manufacturing activity in the region increased 11 points to 12.8. For the first time since August of last year, the index has registered two consecutive positive readings (see Chart 1). The new orders index also improved, increasing from -7.2 to 1.4. The percentage of firms reporting increases in new orders this month edged up to 30 percent from 27 percent last month. Other current indicators suggested weaker conditions, however. The current shipments index declined from 8.4 in August to -8.8 this month. Both the delivery times and unfilled orders indexes remained weak, with both indexes staying in negative territory. Firms also reported declines in inventories this month: The inventories index declined from -9.2 to -26.2. The indicators for unfilled orders, delivery times, and inventories have been negative for most of this year.
Firms reported continued weakness in manufacturing employment. The percentage of firms reporting a decrease in employees in September (17 percent) exceeded the percentage reporting an increase (12 percent). The current employment index remained negative for the ninth consecutive month, although it improved from -20.0 in August to -5.3 this month. Firms reported overall decreases in the average workweek: The percentage of firms reporting a shorter workweek (23 percent) was greater than the percentage reporting a longer workweek (11 percent).
Most Firms Report Steady Prices, but Price Indexes Edge Up
Input prices continued to increase for many of the reporting manufacturers: The prices paid index edged 1 point higher, to 20.6, its sixth consecutive positive reading (see Chart 2). Although nearly 71 percent of the firms reported that input prices were unchanged, the percentage of firms reporting price increases (23 percent) exceeded the percentage reporting price decreases (3 percent). With respect to prices received for firms’ own manufactured goods, the largest percentage of firms (75 percent) reported no change in prices. The percentage of firms reporting price increases for their own products (16 percent) exceeded the percentage reporting price decreases (6 percent) for the seventh consecutive month. The index for current prices received edged 3 points higher, to 9.7.
Expectations Are Still Positive, and the Employment Forecast Improves
Overall, firms remain optimistic about business conditions over the next six months and were more upbeat about prospects for employment. The diffusion index for future activity declined from 45.8 in August to 37.5 in September but remains slightly above its average reading over the past 12 months (see Chart 1). Nearly 50 percent of the firms expect increases in activity over the next six months, and 54 percent expect increases in new orders. Firms are now forecasting longer delivery times as well as increases in inventories and unfilled orders. The future employment index increased sharply this month, from 12.9 to 24.9. Nearly 34 percent of the firms said they expected to expand employment over the next six months, while 9 percent expected to reduce employment.
Weak Economic Conditions Cited as Major Reason for Shifted Capital Spending Goal
In this month’s special questions, firms were asked about spending plans related to achieving company growth. Modernization of manufacturing processes (64 percent) was the most frequently cited goal of capital spending, followed by expansion of facilities (30 percent). Fewer firms, but still notable percentages, indicated other goals to achieve growth: launching of new units (19 percent), acquisition of other companies (17 percent), and the purchase of other companies’ assets (16 percent). Internationalization and joint ventures were cited by slightly smaller percentages: 13 percent and 12 percent, respectively.
Firms were also asked about how these same cited goals had changed over the past five years. Over 59 percent of the firms indicated that modernization had become more important, while only 4 percent indicated it was less important. On balance, expansion of facilities had become less important: Thirty-three percent of the respondents cited it as less important compared with 28 percent indicating it was more important. Firms cited weak economic conditions as the most important reason capital spending for either expansion of facilities or modernization had become “less important” over the past five years. Fifteen percent of the firms cited fewer profitable opportunities. Smaller but notable percentages of firms gave other reasons: policy uncertainty (12 percent), regulations (12 percent), and tax policies (7 percent).
Summary
The Manufacturing Business Outlook Survey suggests continued growth of the region’s manufacturing sector in September. Indexes for both general activity and new orders indicated expansion. However, firms reported an overall reduction in shipments this month, and employment indicators suggested continued weakness. Firms remained optimistic about increases in overall business activity over the next six months and were more upbeat with regard to their employment forecasts.
Posted: September 15, 2016 Thursday 08:30 AM