Manufacturing Continues to Improve in Philadelphia

Companies expect acceleration in production over the next quarter.

Most of the firms included in the Federal Reserve of Philadelphia's Business Outlook survey indicated that regional manufacturing activity continued to show improvement in March. The survey's indicators either improved from their readings in February or remained at relatively high levels.

Increases in input prices continue to be widespread, and more firms have been reporting increases in prices for their manufactured goods in recent months. Most firms also indicated that they expect acceleration in production over the next quarter.

Indicators Suggest Growth Picked Up

The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, increased from 35.9 in February to 43.4 this month. This is the highest reading since January 1984. The demand for manufactured goods is showing continued strength: The new orders index increased 17 points this month, the sixth consecutive monthly increase. The shipments index was little changed this month and remains at a high level. Firms also reported that unfilled orders and delivery times rose again this month. Twice as many firms reported increases in inventories this month (24%) than reported decreases (12%). And the current inventory index has now been positive for three consecutive months and is at its highest reading in four years.

Firms' responses continue to indicate overall improved labor market conditions. The current employment index fell back 5 points, but for the seventh consecutive month, the percentage of firms reporting an increase in employment (25%) is higher than the percentage reporting a decline (7%). Over twice as many firms reported a longer workweek (25%) than reported a shorter one (12%).

Firms Continue to Report Higher Prices

Firms continue to report price increases for inputs as well as their own manufactured goods. The prices paid index declined 3 points this month but has still increased 51 points over the past six months. Sixty-four percent of the firms reported higher prices for inputs this month. On balance, firms also reported a rise in prices for manufactured goods: The prices received index increased 2 points and has steadily increased in recent months. Thirty-two percent of firms reported higher prices of their own goods this month, compared with 29% in February.

Manufacturing Outlook Improves

The future general activity index increased 16 points, to a reading of 63.0, its highest reading since February 1993. The indexes for future new orders and shipments also improved, increasing 18 and 8 points, respectively. Continuing to reflect optimism about employment expansion in the manufacturing sector, the future employment index increased 6 points. More firms expect to increase employment over the next six months (33%) than expect to decrease employment (2%).

In special questions this month, firms were asked about their expectations for production growth for the upcoming second quarter. Over 75% of the firms expect increases in production in the second quarter; 10 percent expect decreases. This is in contrast to the situation in March of last year, when 57% of the firms were expecting growth and 17% were expecting declines in production. Sixty-six percent of the firms said second quarter production growth would represent an acceleration in growth (16% characterized it as "significant acceleration"; 49% said the expected growth represented "some acceleration.")

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