Philadelphia Fed: Manufacturers see steady business activity in October

Results from the Federal Reserve Bank of Philadelphia's Business Outlook Survey suggest that regional manufacturing activity was steady in October. Although the broad survey measures showed marginal improvement this month, the new orders index continued to suggest weak demand for manufactured goods. More firms reported increases in input prices this month, although the prices of firms’ manufactured goods continued to decline. The survey’s broad indicators of future activity suggest that optimism among the region’s manufacturing executives improved notably this month.

Indicators Suggest Steady Activity
The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from a reading of minus-0.7 in September to 1.0 in October. The index had been negative for two consecutive months (see chart). Indexes for new orders and shipments continued to indicate weakness this month: The new orders index increased 3 points but remained negative for the fourth consecutive month. The shipments index increased 9 points, moving the index above zero for the first time in three months. Firms continue to report overall declines in inventories and unfilled orders and shorter delivery times.

Firms reported near steady employment again this month, but lower average work hours for existing employees. The percentage of firms reporting increases in employment (20 percent) narrowly edged out the percentage of firms reporting decreases (17 percent). The index for employment was slightly positive for the second consecutive month but increased just 1 point. Indicative of still weak activity, more firms reported declines in average work hours for existing employees (22 percent) than reported increases (16 percent).

Higher Input Prices Are Reported
Price increases for inputs were more widespread this month. The prices paid index, which had declined 33 points over the previous five months, increased 22 points. Thirty-four percent of the firms reported higher prices for inputs, compared with 23 percent in the previous month. On balance, firms continued to report declines in prices for their own manufactured goods: More firms reported decreases in prices (16 percent) than reported increases (7 percent). And the prices received index remained negative for the fifth consecutive month.

Optimism Rebounds This Month
The future general activity index remained positive for the 22nd consecutive month and increased 15 points, to a reading of 41.0, its highest reading in sixmonths (see chart). The future new orders and shipments indexes also showed improvement, increasing 22 and 13 points, respectively. More firms expect to increase employment over the next six months (32 percent) than expect to decrease employment (11 percent). The future employment index increased 11 points to its highest reading in five months.

Firms’ expectations for future price increases showed a noteworthy increase this month. The future prices paid and prices received indexes increased 25 points and 6 points, respectively.

For this month's special questions, manufacturers were asked about changes in their workforce and the changing use of flexible workers over the past year (see Special Questions). Although the share of firms that increased their total workforce over the past year (40 percent) narrowly outnumbered those decreasing their workforce (35 percent), the mix of employment changed for many firms. For example, 64 percent of firms indicated that they used temporary or agency workers, and 32 percent indicated that they increased the total share of these workers over the past year.

Summary
According to respondents to the October Business Outlook Survey, regional manufacturing activity was nearly steady this month. Indicators for growth, although improving from last month, remained at levels that suggest slight growth, at best. Firms maintained nearly steady employment levels this month, but average work hours fell, as in the previous month. Firms continued to expect growth in their manufacturing business over the next six months, and the degree of confidence improved notably from the surveys conducted during the summer months.

Special Questions (October 2010)