The Federal Reserve Bank of Philadelphia’s Business Outlook Survey contracted again in May, declining for the first time since February. The composite index of general business conditions declined from 1.3 in April to -5.2 in May. The index was brought lower by reductions in new orders, shipments, and employment. Specifically, the new orders index dropped from -1.0 to -7.9, with over one-third of respondents saying that their sales had declined in the past month.

The indices looking at current activity declined, indicating some sluggishness this month. For instance, the shipments index shifted from modest growth in April (9.1) to a modest contraction in May (-8.5). The percentage of respondents saying that their shipments had declined from the previous month increased from 18.8 percent in April to 32.4 percent in May. The average workweek, unfilled orders, and delivery times were all negative, as well.

Unlike the Empire State Manufacturing Survey from the New York Fed, which was released yesterday, manufacturers in the Philly region were hiring fewer workers in May. The index for employment declined from -6.8 to -8.7. The two surveys did agree, though, on the forward-looking hiring measures. The index of expected employment six months from now rose from 8.2 to 10.0, suggesting that manufacturers plan to increase their hiring in the coming months moderately.

Indeed, manufacturers in the Philly Fed region remain cautiously optimistic about the future. The general business activity measure for six months from now rose from 19.5 to 32.3. Almost 45 percent of those completing the survey anticipate better economic conditions in the coming months, with 36.3 expecting them to be the same. Manufacturers are also planning for increased sales, shipments, and capital spending in the second half of 2013.

Regarding inventories, 58.1 percent of those answering a special question on the topic said that their stockpiles were “about right for current economic conditions.” Just over one-quarter of them expect to decrease their inventories in the second quarter, and in fact, the forward-looking index for inventories reflects a slight contraction.

Chad Moutray is the chief economist, National Association of Manufacturers.

The Manufacturing Alliance for Productivity and Innovation (MAPI) said that its composite index of manufacturing activity edged slightly higher from 55 in the fourth quarter of 2012 to 56 in the first quarter of 2013. This is the third consecutive quarter where the index has been in the mid-50s, suggesting modest growth in the sector. Readings over 50 indicate an expansion, with sub-50 values suggesting contraction. The uptick in the index this quarter, though, does reverse 10 quarters of decline, which is a definitely a positive sign.

With that said, many of the subcomponents regarding the current economic environment suggest a high degree of weakness in the manufacturing marketplace. The index of current orders shifted from moderate growth in the fourth quarter (57) to a slight contraction in the first quarter (47). This decrease in demand also included exports, with the export orders index dropping from 49 to 45. In addition, just 20.7 percent of manufacturers responding to this survey said that they were operating above 85 percent of their capacity, down from 31.5 percent last quarter.

These data indicate that there is significant softness in the manufacturing sector. Other data points, such as the purchasing managers’ indices from the Institute for Supply Management or Markit, have shown the pace of new orders and exports decelerating, but the MAPI report says that these points are contracting. As such, the MAPI data tend to more closely align themselves with some of the regional sentiment surveys, such as the most recent one from the Kansas City Federal Reserve Bank.

Despite the weaker data on current conditions, manufacturers in the MAPI survey (and others) are cautiously optimistic about the future, helping to lift the overall composite measure. This is especially true for U.S. sales. The prospective U.S. shipments index for the second quarter is 61. While slightly lower than the 63 reading last time, it still indicates decent growth in shipments for the current quarter. Moreover, the non-U.S. prospective U.S. shipments index declined somewhat from 57 to 53, suggesting very modest growth in exports this quarter.

In addition to orders, manufacturers have relatively healthy plans for both capital investments and research and development spending. The indices for these items are all over 60, with the pace of U.S. and non-U.S. investments picking up from the last survey. This indicates that manufacturers are eager to make the right investments in the future that they need to make to succeed in the future – another positive sign.

Chad Moutray is the chief economist, National Association of Manufacturers.

Markit said that manufacturing activity in February continued to expand, but the pace of new orders slowed somewhat from January. The Flash Manufacturing Purchasing Managers’ Index (PMI) for the United States declined from 55.8 to 55.2, suggesting a marginal change in the overall picture. The good news is that output appears to be recovering strongly, up from 56.8 to 58.1. Five months ago, the output index stood at 51.2, illustrating the improvements seen since then. Moreover, February’s output figure is the highest that it has been since March 2011.

The pace of growth for new orders, employment, and input prices eased a bit. These numbers – particularly sales – helped bring the composite index down for the month, even with higher output. The index for new orders dropped from 57.4 to 56.4. While U.S. sales continued to rise, new export orders contracted once more, reversing two months of modest gains and reflecting continuing weaknesses abroad, especially in Europe (see below). Meanwhile, hiring and raw material prices expanded in February, with each at their slowest pace of the last few months.

Markit Chief Economist Chris Williamson said, “Employment rose in February, but the rate of job creation slowed and remained weaker than policymakers would like to see.” He went on to say: “While the survey … paints an encouraging picture of the manufacturing sector, helping to drive a return to growth for the economy as a whole in the first quarter of this year, firms still need to see greater confidence in the longer-term economic outlook for employment numbers to pick up again.”

This improving – but still cautious – economic outlook in the U.S. stands in contrast to what we continue to see in Europe. The Markit Flash Eurozone Manufacturing PMI was essentially unchanged, down from 47.9 in January to 47.8 in February. While this index has improved from the 44.1 figure observed in August, it continues to reflect a challenging environment for businesses on the continent. The PMI has shown contracting levels since August 2011, or for 19 straight months.

Despite the persistent bad news, the rate of decline for new orders slowed in February in the manufacturing sector. One positive to report was an expansion in new export orders, up from 48.8 to 51.7, the first increase in export sales since June 2011. The Markit report attributed this to increased exports to Asia and the U.S., with strength particularly seen in Germany.

Along those lines, the Flash German Manufacturing PMI shifted from a slight contraction (49.8) to a slight expansion (50.1) for the month. As noted in the Eurozone release, the main driver of the higher index reading was stronger growth in sales, both domestic and foreign. The new orders index rose from 48.5 to 52.7; while the new export orders index increased from 48.2 to 54.6. The jump in sales slowed the decline in employment, at least for February, which was a good sign.

Chad Moutray is the chief economist, National Association of Manufacturers.

The Richmond Federal Reserve Bank said that manufacturing activity in its district expanded for the second straight month, albeit at a slower rate. The composite index of general business conditions declined from 9 in December to 5 in December. Even with the lower number, the key takeaway is the region continues to grow modestly, recovering from the period from June to October when the index was negative for four of the five months. Therefore, there are improvements even as it is clear that the economy is not growing as strongly as we might like.

New orders continued to grow, with its index edging slightly lower from 11 to 10. Meanwhile, the pace of shipments slowed from 11 to 6, and employment turned negative (from 3 to -3). Sluggish hiring growth has been a consistent finding among all of the regional Fed surveys.

This is largely a reaction to anxieties from the fiscal cliff and concerns about its impact on economic growth in 2013. Nonetheless, the Richmond Fed respondents continue to be cautiously optimistic about growth in new orders, shipments, and capital spending over the course of the next 6 months. Each of these figures were less positive than in the previous month, however, reflecting some diminishment in sentiment. Employment and the average workweek are expected to remain sluggish, with the latter anticipated to be contracting.

Pricing pressures were mostly unchanged in December, with the average price paid for raw materials up 2.01 percent at the annual rate. This is not far from the 1.99 percent reported in November. The forward-looking measure anticipates these costs to go up 2.54 percent over the course of the next 6 months, indicating some expectated acceleration.

Chad Moutray is the chief economist, National Association of Manufacturers.

The Census Bureau reported that durable goods orders were unchanged in October. This figure has been highly volatile in the past couple months, with no new orders for aircraft and parts in August and only a partial recovery in September. Durable goods orders remain 5.1 percent lower in October ($216.9 billion) than the level observed in July ($228.6 billion).

Reduced sales in the transportation sector (down 3.1 percent) were the largest factor in dragging total durable goods orders down to virtually no growth. New orders for nondefense and defense aircraft and parts were down 5.8 percent and 4.3 percent, respectively. It is important to note here that both were up significantly in September, with defense aircraft spending up in September largely the result of end-of-fiscal-year spending. Motor vehicle sales were also down 1.6 percent.  

If you were to exclude the transportation sector, new orders would have risen 1.5 percent. This puts a more positive spin on the overall numbers, and most of the major sectors outside of transportation experienced improvements in sales. The largest gains in new orders in October were in electrical equipment and appliances (up 4.1 percent), machinery (up 2.9 percent), primary metals (up 1.7 percent), and fabricated metal products (up 1.1 percent).Sharply lower sales were reported for computers and related products (down 9.3 percent).

Meanwhile, shipments of durable goods declined 0.6 percent in October, reversing the 0.5 percent increase in September. Shipments remain 3.0 percent lower in October ($222.2 billion) than in July ($229.0 billion), reflecting recent weaknesses. Shipments were soft across-the-board, with capital goods down 0.7 percent.

These figures provide mixed news on the durable goods front. On the one hand, the sector has yet to fully recover from declines in sales and shipments experienced over the past three months, and shipments of durables continue to be weak. Yet, outside of transportation, new orders have risen for two consecutive months, which should bode well for improved future activity. Whether or not that can be sustained will depend on improvements in the global economic outlook, as well as lifting the uncertainties created by the fiscal cliff and other headwinds.

Chad Moutray is chief economist, National Association of Manufacturers.

Markit reports an uptick in activity, with its Flash U.S. Manufacturing Purchasing Managers’ Index (PMI) increasing from 51.0 in October to 52.4 in November. The data show that the sector has seen improvements in the past month across-the-board. The index for new orders, for instance, rose from 51.1 to 52.8. More importantly, new export orders – which have been in contraction territory for several months – also made progress, up from 47.2 to 49.9. This suggests some stability in the international sales, with November’s reading near neutral (e.g., a near equal number of respondents said that export sales were increasing as decreasing).

Output, employment, and raw material inventories also improved. The employment index strengthened from 51.8 to 52.6, its highest point since July. Given recent hesitancies to hire, this is certainly good news. The one downside was that input prices picked up their pace and remained highly elevated, with the index growing from 57.1 to 63.6. This indicates increased pricing pressures for many manufacturers.

Chris Williamson, Markit’s Chief Economist, said, “This is an encouraging sign that the slowdown in the goods-producing sector may have bottomed-out. Manufacturing therefore looks likely to make a positive contribution to economic growth in the fourth quarter after acting as a slight drag in the third quarter. The survey is consistent with manufacturing output growing at an annualised rate of just over 1.0% in November.”

Tomorrow, Markit will release new Flash PMI data for both the Eurozone and China markets. Last month’s reports showed Europe’s woes deepening; whereas, China’s economy made some progress, albeit will continued weaknesses.

Chad Moutray is the chief economist, National Association of Manufacturers.

The Census Bureau reported that new durable goods orders rose 4.2 percent in July, its largest gain of the year. This increase was led by a sharp rise in new orders for transportation equipment (up 14.1 percent), primarily among motor vehicles and nondefense aircraft. If you were to exclude transportation, new orders would have fallen by 0.4 percent. Similarly, sales of core capital goods, or nondefense capital goods excluding aircraft, fell 3.4 percent.

These numbers suggest broader weaknesses for manufacturers outside of autos and commercial airplanes. For example, defense aircraft (down 8.5 percent), communications equipment (down 4 percent), machinery (down 3.6 percent), and electrical equipment and appliances (down 2.1 percent) suffered losses in new orders. There were some sectors with positive new orders, including computers (up 3.7 percent) and primary metals (up 2.7 percent).

Meanwhile, shipments increased 2.6 percent in July, an improvement over being unchanged in June. For the most part, the story for shipments mirrors the one for new orders, with transportation leading the gain. If transportation equipment shipments were excluded, the increase was just 0.3 percent.

Chad Moutray is chief economist, National Association of Manufacturers.

The Kansas City Federal Reserve Bank provided some mixed news on the state of manufacturing in its region. On the one hand, the composite index in its monthly manufacturing survey has been positive each month so far in 2012, with mostly slow growth being observed. The index rose from 3 in June to 5 in July. Its high for the year was 13 in February, suggesting an easing in the pace of growth since then.

Yet, some of the components reflect the struggles seen in other regions. For instance, new orders and shipments have contracted for the second month in a row. Some of this was due to slower worldwide growth as reflected in reduced exports. The index for new export orders dropped from -7 to -13. Pricing pressures, after declining in the past two months, began to rise in July. Employers, though, have continued to add workers even as slower activity has reduced the average workweek for existing employees.

Even with sluggish growth this month, manufacturers remain cautiously optimistic about the next six months. Various measures of forward-looking manufacturing activity suggest that businesses anticipate increased production, employment, and capital investments in the second half of this year. The level of positivity is lower than it was two months ago, though. Prices are also expected to go up, even as they have eased recently.

Chad Moutray is chief economist, National Association of Manufacturers.

Manufacturers in its region reported slower growth in activity in June, according to the Kansas City Federal Reserve Bank. The composite index of business activity fell from 9 in May to 3 in June. (It has gone 9-3-9-3 over the past four months.) The largest drag on growth for the month was new orders, which dipped into contraction territory, moving from 10 to -7. This includes new export orders, and overall, it is a sign of weakness, with possible implications for production in future months.

With that said, current production and shipments data continue to expand, albeit at a slower rate. The production index, for instance, fell from 17 to 12. Employment growth also eased in June, and the average workweek for workers declined. Pricing pressures also lessened.

Expectations for six months from now remain upbeat, but the level of optimism has diminished. The forward-looking composite index dropped from 17 to 8, and the production index fell from 40 to 22. This suggests that manufacturers are cautiously optimistic about future activity, but recent events have lessened this to a certain degree. Interestingly, even as employment levels are expected to increase, respondents also said that the average workweek should decrease a little moving ahead.

According to Chad Wilkerson, vice president and economist at the Kansas City Fed, “Many firms noted concerns about economic conditions in Europe, but only a few had experienced sizeable direct negative impacts to date, and Tenth District factories as a whole still expect moderate growth heading forward.”

Chad Moutray is chief economist, National Association of Manufacturers.

The Census Bureau reported that new orders for manufactured goods fell 0.6 percent in April, its third decline for the four months of 2012. The decline was fairly widespread but was particularly acute among defense and nondurable goods industries. Durable goods orders were flat, with nondurables down 1.1 percent. Excluding defense goods, new orders would have declined by 0.2 percent. Core capital goods (e.g., nondefense capital goods excluding aircraft) fell 2.1 percent, building on the 2.3 percent loss in March.

Some sectors did better than others, though. The strongest gains in April for new orders occurred in some of the machinery subsectors (e.g., construction, mining), nondefense equipment and aircraft, electrical equipment and household products, and primary metals industries.

Looking at shipments, the data were slightly more positive, but still weak overall. Shipments of manufactured goods dropped 0.3 percent in April, with durable goods up 0.6 percent. Nondurable goods and core capital goods were 1.1 percent and 1.5 percent lower, respectively. In addition to the sectors named above, automobiles and light trucks fared well in April, with higher shipment levels. Food, beverages, leather products, and plastics saw improvements among durable goods, with petroleum shipments down.

Overall, this data – like much of what was released last week – continues to show weaknesses in the manufacturing sector.

Chad Moutray is chief economist, National Association of Manufacturers.