The Federal Reserve Bank of Philadelphia reported a sharp increase in manufacturing activity in September. The Business Outlook Survey’s composite index of general business activity surged from 9.3 in August to 22.3 in September. This was the fastest pace since March 2011 and was more than double the consensus expectation. In general, this measure has been highly volatile over the course of this year, making it harder to interpret, with index values ranging from -12.5 in January to the 22.3 reading of September. This was the fourth consecutive month of expansion, with the composite index being 12.5, 19.8, 9.3, and 22.3 in the four months from June forward.
Stronger sales and shipments data were behind the higher composite index value. The new orders index increased from 5.3 in August to 21.2 in September. Behind these figures, it is instructive to see how the responses were different between the two months. Respondents saying that their orders had increased from the previous month rose from 27.7 percent to 38.5 percent; while at the same time, those reporting a decrease in sales for the month declined from 22.4 percent to 17.3 percent. This indicates a nice pickup in new orders, boosting confidence and many of the other data figures. At the same time, it is worth noting that just over 40 percent had sales levels that were unchanged, down from roughly half last time.
The positivity was fairly broad-based, with indices for shipments (up from -0.9 to 21.2), employment (up from 3.5 to 10.3), and the average workweek (up from -2.6 to 12.2) all higher. The news of increased hiring is welcome, but it is also tempered by the fact that 68.3 percent have made no changes to their employment levels.
Moving forward, 56.3 percent of manufacturers in the Philly Fed region expect production to be higher in the third quarter relative to the second quarter, with an average growth rate of 1.6 percent. There is slightly less optimism for the fourth quarter, with 43.8 percent anticipating increased output. Overall, respondents to this survey are cautiously optimistic about the next six months. Over 60 percent predict rising new orders, and over one-third expect to add some more employees. Capital spending plans are also a bit higher, with 36.3 percent planning to increase their investments over the next six months, up from 27.9 percent in August.
Chad Moutray is the chief economist, National Association of Manufacturers.
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