Two East Coast manufacturing surveys released this morning found that manufacturing output has expanded in the past month. This is notable because both of them have witnessed weaknesses in the summer and fall months, and recent improvements are highly welcome.
First, the Empire State Manufacturing Survey from the Federal Reserve Bank of New York observed a much-improved environment in the region. Its general business conditions index increased from 0.6 in November to 9.5 in December. This is two straight months of growth, following five consecutive months of contraction. In essence, manufacturing activity has gone from neutral last month to stronger growth this month.
Most of the key variables experienced growth from November, particularly for new orders, shipments and employment. Inventories, unfilled orders and the average employee workweek contracted. Raw material prices went up again, with the index for prices paid growing from 18.3 last month to 24.4 in December.
Manufacturers in the region are overwhelmingly positive about the new year. The forward-looking indicators were strong across-the-board, especially for new orders and shipments where over 60 percent of respondents said that they anticipated increases. (Given recent weaknesses in manufacturing activity, it is perhaps not surprising that the intensity of those suggesting increases in production should be so strong.) Other variables were also expected to grow over the coming months, including inventories, employment and capital expenditures.
Meanwhile, the Philadelphia Federal Reserve Bank’s Business Outlook Survey found that manufacturers were optimistic about current conditions, with its general index rising from 3.6 in November to 10.3 in December. This is the third consecutive month of expansion. This survey is notable for its -30.7 and -7.5 readings from August and September, reflecting the substantial turnaround in sentiment since the late summer months.
New orders expanded at a much faster pace in December, with the index up from 1.3 in November to 9.7 in December. This will provide momentum moving into 2012. Some of the other variables edged slightly lower, but remained in positive territory. This includes shipments, number of employees, the average employee workweek and capital expenditure plans. Inventories contracted, while unfilled orders grew. Pricing pressures remain a challenge, with the index for the prices paid for raw materials becoming larger.
Looking ahead six months, manufacturers in the Philly region remain strongly optimistic about business conditions, new orders and shipments. It is notable, though, that the index of future employment fell from 25.4 in November to 12.9 in December. This indicates additional hiring in the coming months, but at a slower pace than the previous survey.
Both of these two surveys addressed the issue of price increases in special questions. In the Philadelphia survey, respondents said that prices paid for raw materials increased 4.3 percent on average in 2011, and that is expected to go up another 3.5 percent in 2012. Wages are anticipated to increase by 2.8 percent, with benefits growing a whopping 6.1 percent (on top of the 7.3 percent increase this year). At the same time, the average price increase for their products is expected to be 1.8 percent, suggesting a price squeeze for many manufacturers.
The New York survey was similar. Wages and benefits were anticipated to grow 2.1 percent and 7.3 percent, respectively, in 2012. Energy costs should increase by 1.8 percent; whereas, other raw material costs should rise by 3.3 percent on average.
Chad Moutray is chief economist, National Association of Manufacturers.