Earlier today, the Philadelphia Federal Reserve Bank released new data from its Business Outlook Survey for July. On the positive side, the index of general business activity rose from -7.7 in June to 3.2 in July. This suggests that manufacturers in the Philadelphia region are no longer contracting, and yet, it also implies relatively slow growth.
In many ways, these numbers mirror what we have seen in other regions, with modest rebounds seen in the Kansas City, New York, and Richmond Federal Reserve Bank manufacturing surveys. (Although, the Empire State manufacturing survey remained negative)
Behind these numbers in the Philadelphia survey, new orders stopped shrinking, but also did not grow. The diffusion index for new orders rose from -7.6 to 0.1. Improvements were seen in delivery times, inventories, and employment. In terms of employment, 22 percent of respondents said that they increased their payrolls, versus the 13 percent which shrunk them. However, the average workweek declined, with the index falling from 1.9 in June to -5.4 in July. Unfilled orders remained unchanged at -16.3, and the gap between new orders and inventories was negative for the first time this year.
Pricing pressures, which have plagued manufacturers in recent months, have continued to moderate, with the index for prices paid falling from 26.8 to 25.1. The index had been 67.2 in February, but has steadily fallen since then. Still, this still suggests rising costs, with nearly one-third of respondents noting higher prices during the month. In addition, manufacturers have not been able to pass those costs along to their customers, with the prices received index falling from 4.4 to 1.1.
In terms of expectations for the next six months, the overall index rose from 2.5 last month to 23.7 this month, indicating a noticeable improvement in manufacturers’ outlooks. Expectations of new orders, shipments, inventories, capital expenditures and employment are all higher. With that said, in a series of special questions, survey respondents were asked about increased production in the third quarter, with the median expected increase just 0.5 percent higher. Nearly 30 percent, however, were expecting production to grow by at least 2 percent.
Overall, this survey shows weak manufacturing growth currently in the Philadelphia Federal Reserve region, with some optimism moving forward. Yet, that optimism is widely dispersed, as indicated by the diversity in growth expectations for the third quarter. Of those who say that demand has been slowing, 82 percent cited increased economic uncertainty and 44 percent noted higher energy, commodity, and transportation costs as factors. As I have said before, whatever optimism exists moving forward, it is a cautious one, and policymakers should definitely take notice.
Chad Moutray is chief economist, National Association of Manufacturers.