Philly Fed Survey: Manufacturing conditions to show weakness in February

Editor's Note:  The February 2016 report provided by the Federal Reserve Bank of Philadelphia.

Firms responding to the Manufacturing Business Outlook Survey reported continued
weakness in business conditions this month. The indicator for general activity
remained slightly negative this month, edging up only marginally from its
reading in January. Other indicators offered mixed signals: The shipments index
remained positive, but new orders and employment indexes remained negative and
declined modestly. The survey’s price indexes suggest that both input prices and
selling prices fell this month. With respect to the manufacturers’ forecasts,
the survey’s future indicators remained overall positive but showed continued
weakening. 

Current Indicators Suggest Continued Weak Activity
The diffusion index for current activity increased from a reading of -3.5 in
January to -2.8 in February and has now been negative for six consecutive months.
The index for current new orders remained negative and edged down 4 points, to
-5.3. Firms reported an increase in shipments; the shipments index remained
positive for the second consecutive month but fell 7 points from January. Firms
reported continued declines in inventories, and the inventories index remained
negative. Firms’ backlogs of unfilled orders were in decline again this month,
and delivery times were shorter, according to the responding firms. 

The survey’s labor market indicators suggest continued weak employment
conditions. The employment index decreased 3 points, from -1.9 to -5.0. About 63
percent of the firms reported no change in employment this month, and the
percentage reporting decreases (20 percent) was slightly larger than the
percentage reporting increases (15 percent).  

Firms Still Report Downward Price Pressures
The indexes for both prices paid and prices received were negative. Most firms
(66 percent) reported no changes in the prices for their own manufactured
products this month. The percentage of firms reporting lower prices (18 percent)
was slightly greater than the percentage reporting higher prices (14 percent).
The current prices received index decreased from -2.8 to -4.5 and has recorded
eight consecutive negative readings. Firms reported, on balance, declines in the
prices paid for inputs. The percentage of firms reporting lower input prices (21
percent) was greater than the percentage of firms reporting higher input prices
(19 percent). The prices paid index decreased 1 point and remained negative for
the sixth consecutive month. 

Forecasts Overall Positive, but Confidence Wanes
The diffusion index for future general activity fell from a reading of 19.1 in
January to 17.3 this month. The index has trended down since last summer and is
now at its lowest reading since November 2012. The largest share of firms
expects an increase in activity over the next six months (42 percent), but 25
percent expect declines. The future indexes for new orders and shipments also
edged down slightly this month. Firms’ forecasts for future employment have
been moderating the past few months. The future employment index fell from 5.5
to 2.3 this month, the third consecutive decline. The future workweek index also
declined into negative territory for the first time in six months.

Firms Expect Their Own Price Increases to Remain Below the Rate of Inflation
In this month’s special questions, firms were asked to forecast the changes in
prices of their own products over the next four quarters. The median forecast
was for an increase in their own prices of 1.3 percent, a rate of increase lower
than the rate of inflation expected to be faced by the workers they employ
regionally (2 percent) and lower than the rate of inflation expected for the
average U.S. consumer (2 percent). Firms expect their own per employee
compensation costs (wages plus benefits) to rise by 3 percent over the next four
quarters. When asked about the average rate of inflation for consumers over the
next 10 years, the firms’ median forecast was 2.5 percent. With one exception,
all the responses were identical to the results from November when the questions
were last asked. In November, the median price forecast for firms’ own prices
was slightly lower, at 1 percent.

Summary
Weakness in the region’s manufacturing sector continued this month, according to
firms responding to the February survey. Indexes suggest continued modest
declines in activity and new orders but a continued rise in shipments.
Employment indicators suggest slight decreases in overall manufacturing
employment this month. Indicators for future conditions remained positive
overall but continued to trend downward.

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