The New York Federal Reserve Bank’s Empire State Manufacturing Survey reported contracting levels of activity for five straight months. The composite index declined from -5.2 in November to -8.1 in December. Almost 62 percent of respondents said that conditions in December were unchanged from the prior month, with 23.2 percent suggesting that it was worse.

Slowdowns from Hurricane Sandy were a large factor in the weak economic data in November, but it is clear that the manufacturing sector has had a rough second half of 2012 – both before and after the effects of the storm. Uncertainties related to the fiscal cliff, as well as worries about slowing sales, have had an impact.

New orders declined on average in December, down from 3.1 to -3.7. The percentage of manufacturing reporting higher sales for the month dropped from 29.1 percent to 19.1 percent, leading to the drop in the index into contraction territory. Shipment levels remain positive, but at a slower pace of growth (down from 14.6 to 8.8). With reduced sentiment and weaker orders and shipments data, businesses have pulled back on hiring. The index for employment was -9.7, with the average employee workweek at -10.8.

Despite these findings, manufacturers in the New York district were more upbeat about the next six months. The forward-looking general business conditions index rose from 12.9 to 18.7. Nearly 52 percent of firms anticipate increased sales in the coming months, with just 19.4 percent expecting reduced orders. This outlook suggests higher levels of shipments, hiring, and capital spending, with each up modestly.

In a series of special questions, respondents were asked about their forecasts for prices and costs in 2013. In terms of employee compensation, they expect wages to grow 3.1 percent next year, with benefits – namely health insurance costs – up 7.2 percent. This will build on the reported 2.7 percent and 6.4 percent on average increases observed in 2012. Overall, manufacturers anticipate their costs to rise 4.0 percent next year. In terms of selling prices, the average price increase was 1.0 percent, down from the 1.8 percent gain expected in a similar question posed one year ago.

Overall, the Empire State survey continues to show significant weaknesses in the manufacturing sector – something that we see in other regional sentiment surveys. Lower sales levels suggest that these struggles will continue moving into January. With that said, the increased forward-looking measures suggest that businesses are cautiously optimistic about activity in 2013.

Chad Moutray is chief economist, National Association of Manufacturers.

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