The Federal Reserve Bank of Philadelphia reported that manufacturing activity eased in August. The Business Outlook Survey’s composite index of general business activity dropped from 19.8 in July to 9.3 in August. On the one hand, this suggests that the sharp increase in sentiment observed last month has moderated a bit, which might be expected. That index reading had been the fastest pace since March 2011, for instance, and June and July’s healthy gains followed much weaker data from January to May. With that said, it is also clear that there remain some pockets of softness in activity.
For instance, shipments contracted slightly in August, with its index reading down from 14.3 to -0.9. The shift occurred mostly because 38.0 percent had said that shipments were higher in July, but only 26.0 percent said the same thing in August. The majority of that difference went into the “no change” category. Likewise, new orders declined from 10.2 to 5.3. While this still suggests modest gains in sales for the month, the percentage of respondents reporting increased new orders declined from 35.1 percent in July to 27.7 percent in August. Almost half said that their orders were flat.
Looking at the other August data, inventory reductions declined at a slower rate (up from -21.6 to -11.3), and pricing pressures decelerated somewhat (down from 21.5 to 17.3). On the employment front, the pace of hiring slowed (down from 7.7 to 3.5), with 65.0 percent of respondents saying that their hiring had not changed. On the negative side, the average employee workweek was modestly lower, down from 6.6 to -2.6. The percentage of manufacturers with a longer average workweek dropped from 21.5 percent in July to 16.4 percent in August, helping to explain this shift.
The good news is that manufacturers continue to be cautiously optimistic about the next 6 months, with some deceleration in sentiment reported in this survey. The forward-looking composite index declined from 44.9 to 38.9. Yet, over half of respondents anticipate increased new orders and shipments ahead, and more than one-quarter expect to hire additional workers and invest in more capital spending. As such, even with the easing, manufactures in the Philly Fed region remain fairly upbeat about the second half of this year.
Chad Moutray is the chief economist, National Association of Manufacturers.