Activity in the region's manufacturing sector continues to expand, according to firms polled for this month's Business Outlook Survey. Although the general activity index declined slightly this month, indicators for new orders and shipments were up notably from last month's readings, and the employment indexes also improved. Firms continued to report higher prices for inputs and for their own manufactured goods, with slightly more firms reporting higher prices for finished goods in June than in May. Despite favorable readings for current activity, the region's manufacturing executives were significantly less optimistic this month about future growth.
Expansion Continues
The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 14.4 in May to 13.1 this month (see Chart). Twenty-seven percent of the firms reported increases in activity; 14 percent reported decreases. The new orders index increased 15 points from its relatively low reading of 2.7 last month. The new orders index is now several points higher than its average since the beginning of the year. The shipments index increased six points this month. Slightly more firms reported declines in unfilled orders than reported increases. Marginally more firms reported shorter delivery times than reported longer delivery times. For the third consecutive month, more firms reported a decline in inventories than reported an increase.
The expansion in manufacturing is evident in replies to questions about employment and hours worked. The current employment index remained positive and increased six points from its relatively low reading last month. Seventeen percent of the firms reported increases in employment, nearly the same as last month. On balance, the workweek continued to increase this month: More firms reported a longer workweek (17 percent) than reported a shorter one (8 percent).
Higher Prices for Manufactured Goods
Although, on balance, respondents reported higher production costs again this month, the prices paid index fell six points, the first decrease in three months. Fifty-five percent of the firms reported higher input prices, down from 58 percent in May. Higher prices for final manufactured goods were reported by 22 percent of the firms, up from 16 percent last month. The prices received index increased four points this month.
Six-Month Forecasts Are Less Optimistic
Expectations for future manufacturing growth showed significant deterioration this month; indexes for general activity, new orders, and shipments all decreased from their May readings. The future general activity index dropped 16 points, reaching its lowest level since January 2001 (see Chart). The new orders index fell 13 points; the shipments index fell four points. Despite the decline in broad future indicators this month, the future employment index increased 12 points from its relatively low reading in May. Thirty-one percent of the firms expect to increase employment over the next six months; 15 percent expect to decrease it.
In special questions this month, firms were asked about changes in employment expected over the next six to 12 months (see Special Questions). Forty-nine percent of respondents indicated that employment would increase; this is slightly higher than the 43 percent who anticipated increased employment at this time last year. Some upward movement in wages is evident in responses regarding wage rates being offered to new hires or contracts. Sixty-seven percent of the firms indicated that wage rates are increasing for new hires. Most of the increases were between 1 percent and 3 percent, but 23 percent of the firms increasing wages indicated that the percentage increases are higher than they were 12 months ago.
Summary
Indicators of current activity all point to continued growth of the region's manufacturing sector this month. Indexes for general activity, new orders, and shipments all remained positive, and the employment indexes showed some improvement this month. More than half of the firms surveyed continue to report cost pressures, and the percentage of firms reporting higher prices for their manufactured goods increased slightly this month. Indicators for the next six months suggest that firms are less positive about the prospect of growth than they were a month ago, yet nearly one-third of survey participants expect employment gains over the next six months.
Special Questions (June 2006)
1. What percent change in employment do you plan over the next six to
12 months?
June 2006 June 2005
Total Increase 49.4% 43.0%
Increase of 0-3% 30.4% 21.5%
Increase of 4-6% 16.4% 13.9%
Increase of 7-9% 1.3% 6.3%
Increase of 10%+ 1.3% 1.3%
Total Decrease 13.9% 11.4%
Stay at current levels 36.7% 45.6%
Total 100.0% 100.0%
2. How much are you increasing wage rates for new hires or contracts?
Total Increase 66.6%
Increase of 1-3% 54.3%
Increase of 4-6% 11.1%
Increase of 7-9% 0.0%
Increase of greater than 9% 1.2%
No Increase 27.2%
No Response 6.2%
3. If you are increasing wage rates, is the percentage increase higher,
lower, or the same as 12 months ago?
Higher 22.8%
Lower 8.8%
Same 68.4%
BUSINESS OUTLOOK SURVEY
(June 2006)
June vs. May
Previous
Diffusion No Diffusion
Index Increase Change Decrease Index
What is your
evaluation of the
level of general
business activity? 14.4 27.3 53.9 14.3 13.1
Company Business Indicators
New Orders 2.7 31.8 52.1 14.1 17.7
Shipments 11.7 30.7 55.9 13.0 17.7
Unfilled Orders -2.2 16.8 62.1 18.8 -2.1
Delivery Times 9.6 11.3 72.6 12.6 -1.2
Inventories -3.9 17.7 55.3 22.9 -5.2
Prices Paid 55.3 54.9 38.9 6.2 48.7
Prices Received 10.3 22.3 67.2 8.3 14.0
Number of Employees 1.1 16.7 72.2 9.8 6.8
Average Employee
Workweek 8.5 17.0 73.5 7.8 9.2
Capital Expenditures -- -- -- -- --
Six Months from Now vs. June
Previous
Diffusion No Diffusion
Index Increase Change Decrease Index
What is your
evaluation of the
level of general
business activity? 22.5 30.9 38.4 24.1 6.8
Company Business Indicators
New Orders 24.3 35.1 34.3 24.2 10.9
Shipments 18.4 37.7 32.0 23.3 14.4
Unfilled Orders 3.4 21.2 46.0 25.9 -4.8
Delivery Times 3.2 11.5 61.5 20.1 -8.6
Inventories 5.8 16.1 48.6 29.3 -13.3
Prices Paid 58.2 57.3 27.8 7.4 50.0
Prices Received 37.6 36.5 51.0 4.9 31.6
Number of Employees 4.8 31.3 46.1 14.5 16.9
Average Employee
Workweek 5.4 16.4 59.4 18.6 -2.2
Capital Expenditures 19.3 26.1 44.9 11.3 14.7
NOTES:
(1) Items may not add up to 100 percent because of omission by
respondents.
(2) All data are seasonally adjusted.
(3) Diffusion indexes represent the percentage indicating an increase
minus the percentage indicating a decrease.
(4) Survey results reflect data received through June 13, 2006.
Source: Federal Reserve Bank of Philadelphia