Philadelphia Fed Business Outlook Survey April 2016

Firms responding to the Manufacturing Business Outlook Survey reported no improvement in business conditions this month. The indicator for general activity, which rose sharply in March, fell to a slightly negative reading in April. Other broad indicators suggested a similar relapse in growth that was reported last month. The indicators for both employment and work hours also fell notably. Despite weakness in current conditions, the survey’s indicators of future activity showed continued improvement, suggesting that the fallback is considered temporary.

Current Indicators Fall from Last Month’s Readings

The diffusion index for current activity decreased from 12.4 in March to -1.6 this month. The index had turned positive last month following six consecutive negative readings (see Chart 1). The current new orders and shipments indexes also fell this month. The percentage of firms (23 percent) reporting a rise in new orders was exactly offset by the percentage reporting a decline. The current new orders index decreased from 15.7 to zero this month, while the current shipments index fell precipitously, from 22.1 to -10.8. The unfilled orders and delivery time indexes suggested weakness, as both indexes were in negative territory this month. Firms continued to report overall declines in inventories.

The survey’s indicators of employment corroborate weakness in the other broad indicators this month. The employment index decreased 17 points and registered its fourth consecutive negative reading. Nearly 62 percent of the firms reported no change in employment this month, but the percentage reporting decreases rose from 17 percent in March to 27 percent this month. Firms reported a notable decline in average work hours: The index decreased 22 points and returned to negative territory after last month’s first positive reading in three months.

Output Prices Rise Slightly

Manufactured goods prices, on balance, rose slightly this month. The prices received index increased 4 points, to 7.4, its second consecutive positive reading (see Chart 2). But the largest share of firms (75 percent) reported no change in prices this month. Input price increases were reported by 15 percent of the firms this month. The prices paid index, which had remained negative for seven consecutive months, increased 14 points, to 13.2.

Outlook Improves Again This Month, Despite Current Weakness

The survey’s future indicators bucked the trend of weakening current indicators this month. The diffusion index for future general activity increased from a reading of 28.8 in March to 42.2 this month. This is the highest reading for the index in 15 months (see Chart 1). The largest share of firms (51 percent) expect an increase in activity over the next six months, while only 9 percent expect declines. The future indexes for new orders and shipments also moved higher this month, increasing 10 points and 7 points, respectively. The future employment index also increased, from 6.3 to 14.2. More than 25 percent of the surveyed firms expect to increase employment levels over the next six months. This is slightly higher than the 22 percent that increased employment last month. The indexes for future prices paid and received edged higher this month, increasing 12 points and 8 points, respectively.

Spending on Security and Regulatory Compliance Is on the Rise

In this month’s special questions, firms were asked about recent trends in spending related to security and regulatory compliance. Sixty percent of the responding firms reported higher spending for cybersecurity/network security, while 31 percent reported higher spending for physical security. The largest percentage of firms (74 percent) reported increased spending for general regulatory compliance, and 26 percent characterized those increases as substantial. As a share of total capital spending, spending devoted to data security (5 percent) exceeded spending for physical security (3 percent), and their combined total exceeded the average share for regulatory compliance (6 percent).

Summary

This month’s Manufacturing Business Outlook Survey suggests a relapse in growth of the region’s manufacturing sector. The survey’s indicators for general activity, new orders, shipments, and employment all fell notably from their readings in March. Despite reported weakness this month, firms’ forecasts for the next six months showed continued improvement, suggesting that the reported decline in growth is expected to be temporary.

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