Manufacturing conditions in the region contracted modestly this month, according to firms responding to the January Manufacturing Business Outlook Survey. The indicator for general activity remained negative this month; however, it rebounded from a lower reading in December. Other indicators offered mixed signals: Shipments increased this month, but new orders and employment declined modestly. The survey’s price indexes suggest continued downward pressure on manufacturing prices. With respect to the manufacturers’ forecasts, nearly all the survey’s future indicators showed continued weakening this month while remaining positive.

Most Current Indicators Suggest Weak Activity
The diffusion index for current activity increased from a revised reading of -10.2 in December to -3.5 and has now been negative for five consecutive months (see Chart 1 above).* The index for current new orders remained negative but increased 10 points, to -1.4. Firms reported an increase in shipments to begin the new year: The shipments index increased 12 points, its first positive reading in four months. Firms reported continued declines in inventories: The inventories index remained negative and decreased 10 points. Firms’ backlog of unfilled orders also declined this month, and delivery times were shorter, according to the responding firms.

The survey’s labor market indicators suggest weaker employment. The employment index decreased 4 points, from 2.2 to -1.9. Nearly 69 percent of the firms reported no change in employment this month, and the percentage reporting decreases (16 percent) was slightly larger than the percentage reporting increases (14 percent).

Firms Still Report Downward Price Pressures
Most firms (76 percent) reported no changes in the prices for their own manufactured products this month. The percentage of firms reporting lower prices (13 percent) was slightly greater than the percentage reporting higher prices (10 percent). Although the current prices received index increased from -8.5 to -2.8, the index has recorded seven consecutive negative readings (see Chart 2 below). Firms reported, on balance, declines in the prices paid for inputs. The percentage of firms reporting lower input prices (18 percent) was greater than the percentage of firms reporting higher input prices (17 percent). The prices paid index increased 7 points but remained negative for the fifth consecutive month.

Future Indexes Continue to Slide
The diffusion index for future general activity fell from a revised reading of 24.1 to 19.1 this month. The index has trended down since last summer and is now at its lowest reading since November 2012 (see Chart 1 above). The largest share of firms expects an increase in activity over the next six months (43 percent), but 24 percent expect declines. The future indexes for new orders and shipments also deteriorated this month, decreasing 13 points and 15 points, respectively. Firms’ forecasts for future employment have been modest during the past few months. The future employment index fell from 7.0 in December to 5.5 this month, the lowest reading since November 2012.

Energy Price Reductions Are Positive Overall
In this month’s special questions, firms were asked about the effects of lower energy prices on manufacturing business. The responses indicate that the net effects have been positive but that a large share of firms reported negative impacts from decreased demand from energy-producing customers. Nearly 51 percent of the firms reported overall positive effects from lower energy prices, while 30 percent reported negative effects. The largest percentage (33 percent) characterized the effect as slightly positive. Over 41 percent of the firms cited that falling energy prices had lowered the costs of production, but nearly the same percentage of firms (42 percent) said the lower prices had decreased demand from energy production–related customers. For 22 percent of the firms, energy cost reductions were increasing sales margins, but on the negative side, 22 percent indicated that the lower energy costs had reduced revenues. With regard to their own expectations for energy prices over the next six months, firms were evenly divided about whether their forecasts for energy prices would increase (32 percent) or decrease (30 percent) demand. About the same percent (30 percent) said demand would not be affected.

Summary
Weakness in regional manufacturing conditions continued this month, according to firms responding to the January survey. While indexes for current general activity and new orders remained negative, the indexes increased from lower readings at the end of last year. Firms reported an increase in shipments this month but a modest decrease in employment. Indicators for future conditions remained positive overall but suggested a continuing deterioration in confidence about manufacturing growth for the first half of 2016.