U.S. January Philadelphia Business Outlook Report (Text)

The following is the text of the Philadelphia area manufacturing activity from the Federal Reserve Bank of Philadelphia.

Manufacturing activity declined moderately this month, according to firms responding to the January Business Outlook Survey. Following reported increases in business activity in late 2012, most indicators fell back from their readings posted last month. The survey’s broad indicators of future activity, however, showed some improvement this month.

Indicators Suggest Slight Declines

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a revised reading of 4.6 in December to -5.8 this month (see Chart).* The demand for manufactured goods showed slight declines this month: The new orders index declined from a revised reading of 4.9 in December to -4.3 in January. The shipments index remained slightly positive but suggests no overall growth--the percentage of firm with increased shipments was mostly offset by the percentage reporting decreased shipments (26 percent). The indexes for both delivery times and unfilled orders recorded slightly negative readings this month.

Labor market conditions at reporting firms deteriorated this month. The employment index, at -5.2, fell from -0.2 in December. The percentage of firms reporting decreases in employment (16 percent) exceeded the percentage reporting increases (11 percent). Firms also indicated a decrease in the average workweek compared to last month.

Price Indexes Moderate

The indexes for prices received for respondents’ own manufactured goods and prices paid for purchased inputs suggest reduced price pressures this month. The prices received index decreased 14 points, from 12.4 to -1.1. The percentage of firms reporting lower prices for their own manufactured goods (9 percent) was slightly greater than those reporting higher prices (8 percent). The prices paid index fell 9 points; 20 percent of firms reported higher costs, compared to 27 percent last month.

Six-Month Indicators Improve

The survey’s future indicators suggest that firms expect recent declines to be temporary. The future general activity index in-creased from a revised reading of 23.7 to 29.2, its second consecutive monthly increase (see Chart). The percent expecting increases in activity over the next six months (43 percent) exceed the percentage expecting decreases (14 percent). The future new orders and shipments indexes also improved, increasing 4 points and 11 points respectively. The future employment index, however, fell modestly from 11.2 to 10.7. Only 22 percent of firms expect employment to increases over the next six months.

In this month’s special questions, firms were asked about the factors that are influencing their hiring plans over the next 12 months (see Special Questions). The most frequently cited factors among firms restraining hiring were the need to keep operating costs low and low expectations for sales growth. Uncertainty about healthcare insurance and regulations were also highly ranked factors. Thirty-seven percent of the firms indicated that federal fiscal policy developments have decreased hiring plans.

Summary

The January Business Outlook Survey suggests that activity in the region’s manufacturing sector decreased moderately this month. Firms reported decreases in overall activity, new orders, and employment this month. Firms also reported a moderation of prices pressures compared to the previous month. The survey’s future activity indexes suggest that firms expect growth over the first six months of 2013.

* The survey’s annual historical revisions, which incorporate new seasonal adjustment factors, were released on January 10, 2013. The full set of revised historical data is available at: http://www.philadelphiafed.org/research-and- data/regional-economy/business-outlook-survey/historical-data/revisions/historical- revisions-2013.cfm.

SPECIAL QUESTIONS (January 2013)

1. What are the three most important factors, if any, restraining your hiring plans?

Factor Most Second Most Third Most Total

Important Important Important

Firm wants to keep operating costs low 16.4% 19.2% 9.6% 45.2% Expected growth of sales is low 27.4% 9.6% 5.5% 42.5% There is uncertainty about the cost of health insurance 5.5% 12.3% 15.1% 32.9% There is uncertainty about other regulations or government policies 9.6% 6.8% 11.0% 27.4% Firm cannot find workers with required skills 8.2% 5.5% 11.0% 24.7% Labor costs are high 5.5% 8.2% 6.8% 20.5% There are no sources of restraint 12.3% 4.1% 1.4% 17.8% Current staff is underutilized/working reduced hours 1.4% 6.8% 5.5% 13.7% Firm’s financial position has deteriorated 2.7% 5.5% 2.7% 11.0% Other 2.7% 1.4% 1.4% 5.5%

2. What effects have federal fiscal policy developments had on your hiring plans?

Increased hiring plans 4.1% Decreased hiring plans 37.0% No change in hiring plans 49.3% NR 9.6% Total 100.0%

Notes: (1) Items may not add to 100 percent because of omission by respondents.

(2) All data are seasonally adjusted.

(3) Diffusion indexes represent the percentage of respondents indicating an increase minus the percentage indicating a decrease.

(4) Survey data reflect information received through January 15, 2013.

SOURCE: Federal Reserve Bank of Philadelphia

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