The Federal Reserve Bank of Philadelphia’s Business Outlook survey found that manufacturing activity in its district weakened in January. The composite index of general conditions declined from 4.6 in December to -5.8 in January. This reflects seasonal adjustments revisions in the historical data series, something that is commonly performed at the beginning of the year.
Illustrating the slower growth and challenges faced in the manufacturing sector over the past year, the index was negative (or contracting) in 6 of the past 12 months. At least part of the increase in December could be explained by recovery from Hurricane Sandy.
Many of the sub-components were also in contraction territory, including new orders, inventories, prices received, employment, and the average workweek. Almost one-third of respondents, for instance, said that their sales levels had decreased in the past month, with another 42 percent indicating no change. The index for shipments went from decent growth (14.7) to being essentially flat (0.4).
On the topic of employment, the survey asked what was holding back hiring plans in a couple special questions. The most prevalent responses (cited by over 40 percent of them) were (1) the desire for the firm to keep operating costs low and (2) lower expectations for sales growth.
Other top factors restraining hiring were uncertainties related to health insurance costs, policy or regulatory uncertainties, and the inability of the firms to find qualified applicants. In terms of the impact of the nation’s fiscal (and political) challenges, 37 percent said that these developments had caused them to reduce hiring, with another 49 percent indicating no impact.
Despite these challenges and the more downbeat assessment of the current outlook, manufacturers were more positive about the next six months. Over 45 percent of them anticipate higher sales, and the forward-looking composite index rose from 23.7 to 29.2. Indeed, most of the indicators reflected a more-optimistic view for this year despite the many headwinds that we all face.
There is still a degree of cautiousness out there. Employment growth is expected to be up just modestly, with its index edging slightly lower from 11.2 to 10.7. In addition, capital spending plans also eased from 10.4 to 6.0.
Chad Moutray is chief economist, National Association of Manufacturers.