Philadelphia Fed Survey Reports Manufacturing Conditions Continued to Weaken in October

PHILADELPHIA

Manufacturing conditions in the region continued to weaken in October, according to firms responding to this month’s Manufacturing Business Outlook Survey. The indicator for general activity remained negative, while the new orders and shipments indexes turned negative this month. Labor market indicators also weakened. The survey’s indicators for prices of inputs and for firms’ own products suggest near-steady prices this month. Although the survey’s future indicators decreased this month, a minority of firms expect a continued downturn in business activity over the next six months.

Indicators Are Weaker in October

The diffusion index for current activity remained negative for the second consecutive month, although it edged slightly higher from -6.0 in September to -4.5. The indexes for current new orders and shipments showed notable deterioration this month, with both indexes falling below zero, marking the first negative reading for the new orders index since May 2013. Indicators for delivery times and unfilled orders were also negative. Thirty percent of the firms reported a decline in inventories this month, and the current inventories index declined 15 points.

The survey’s indicators for labor market conditions suggest slightly weaker employment. The percentage of firms reporting declines in employment (15 percent) was slightly greater than the percentage reporting increases (13 percent). The employment index declined nearly 12 points, from 10.2 to -1.7. Firms also reported overall declines in average work hours in October, and the workweek index was negative for the first time since May.

Prices Are Steady

The surveyed firms reported near-steady prices for inputs and their own manufactured goods this month. With respect to prices of purchased inputs, the percentage of firms reporting lower prices was offset by the percentage reporting higher prices (19 percent). Most firms (60 percent) reported steady input prices. Nearly 70 percent of the firms reported steady prices received for manufactured goods. The percentage of firms reporting higher prices (14 percent) was only slightly greater than the percentage reporting lower prices (13 percent). The prices received index has suggested little, if any, upward price pressure since the beginning of the year.

Future Indexes Fall Back but Still Reflect Optimism

The diffusion index for future general activity fell from a reading of 44.0 in September to 36.7 this month. The percentage of firms expecting increases over the next six months (53 percent) remains significantly greater than the percentage expecting decreases (16 percent). The index, while generally positive, remains below its reading from one year ago. Future indexes for new orders and shipments showed a modest decrease this month, but the majority of firms expect increases over the next six months. Firms also marked down their forecast for employment increases. The future employment diffusion index fell 4 points. The percentage of firms expecting employment increases (25 percent) still exceeds the percentage expecting decreases (11 percent).

Rates of Utilization Suggest Continued Slack

For this month’s special questions, manufacturers were asked about current capacity utilization rates compared with the same time last year. The average capacity utilization rate among the firms polled was 76 percent, very near the current rate estimated for the U.S. manufacturing sector. Polled firms indicated, however, that the current rate was slightly lower than that from one year earlier (77 percent). For the U.S., the capacity utilization rate for the manufacturing sector, overall, is estimated to be near the same as it was one year ago.

Firms were also asked about their plans for different categories of capital spending next year. The share of firms expecting to increase spending was higher than the share of firms expecting decreases for three of six categories (software, noncomputer equipment, and energy-saving investments). For all capital expenditure categories, higher capacity utilization rates were associated with expected increases in capital spending. For example, the current utilization rate among firms expecting to increase spending on noncomputer equipment (82 percent) was notably higher than those expecting to decrease spending (69 percent).

Summary

For the second consecutive month, regional manufacturers reported declines in overall activity. Indexes for new orders, shipments, employment, and average work hours all dipped into negative territory this month. On balance, firms reported near-steady prices. Despite the reported deterioration in current conditions, most firms continued to expect growth over the next six months, although the levels of optimism as suggested by the survey’s future indexes weakened across all broad indicators this month.

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Federal Reserve Bank of Philadelphia
Daneil Mazone, Media Relations Representative
215-574-7163
Daneil.Mazone@phil.frb.org