The Federal Reserve Bank of Philadelphia said that manufacturing activity declined sharply in February, the net contraction since May. The Business Outlook Survey’s composite index of general business activity decreased from 9.4 in January to -6.3 in February. The difference-maker in this figure was the percentage of respondents who said that conditions had worsened in the month, up from 17.5 percent in January to 31.4 percent in February.
With that said, the decrease was more than likely due to poor weather conditions, much as we have seen in other data lately. To the extent that weather was the main factor, this pullback in activity should be temporary.
Nonetheless, February’s data reflected significant weakness in the Philly Fed region, with all of the key indicators down. Helping to lend credence to the weather argument, the index for shipments plummeted from 12.1 to -9.9 for the month, with the percentage of manufacturers reporting decreased shipments rising from 20.6 percent to 35.5 percent. Similarly, new orders (down from 5.1 to -5.2) and the average employee workweek (down from -5.3 to -7.0) were both in contraction territory.
On the positive side, overall hiring continued to expand, albeit modestly and with some easing from January (down from 10.0 to 4.8). Yet, even on the employment front, 56.9 percent of respondents made no changes in their workforce for the month.
Fortunately, the manufacturing community in the Philadelphia Fed district remains mostly positive about the coming months. Nearly half of them said that they expect sales and shipments to be higher six months from now, with just over one-quarter expecting to add workers and increase capital spending. Moreover, despite the dismal February numbers, those taking the survey were positive in their assessment of the first quarter of 2014. When asked about production in the first quarter relative to the last quarter of 2013, 54.7 percent said that they anticipated an increase, versus 28.0 percent that thought that output might fall.
Chad Moutray is the chief economist, National Association of Manufacturers.
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