The Philadelphia Federal Reserve Bank reported a sharp drop in manufacturing activity in August, with its index of general business conditions dropping from +3.2 to -30.7. Respondents noted contractions across the board in new orders, shipments, unfilled orders, delivery times, inventories, number of employees, and the average workweek. This report is dismal, with a particular worry being that new orders fell from +0.1 in July to -26.8 in August, suggesting weaker future growth.
Indeed, the six-month expectations of manufacturers in the Philadelphia region shifted from 23.7 to 1.4 in the past month. Optimism has diminished as the year has progressed given the index was 49.8 in January.
Essentially, manufacturers are marginally positive in their expectations. There is still some optimism for increases in new orders, shipments, employment, and capital expenditures, but the level of enthusiasm has fallen. These same respondents are also expecting the average workweek over the next six months to fall.
Pricing pressures continue to ease, but remain a problem. The index for price paid has fallen from 25.1 in July to 12.8 in August, indicating that the price of raw materials is still growing but at a slower rate. The six-month expectations reflect a belief that that raw materials will continue to grow strongly. At the same time, the prices received index has turned negative, meaning that businesses have begun to reduce prices, with the index falling from +1.1 to -9.0. There is an expectation for some price increases moving forward, but perhaps less than the rise of overall costs.
In summary, this is a bad report, reflecting continuing weaknesses in the manufacturing sector in the Philadelphia region. Business confidence in the economy has dipped significantly – a concern moving forward and one that will hopefully be reversed in the next month’s survey.
Chad Moutray is chief economist, National Association of Manufacturers.