Philly Fed Outlook -43.1 in May

Manufacturing firms reported continued weakness in regional manufacturing activity this month, according to results from the Manufacturing Business Outlook Survey. Despite remaining well below zero, the survey’s current indicators for general activity, new orders, shipments, and employment rose this month after reaching long-term low readings in April. The firms expect the current slump in manufacturing activity to last less than six months, as the broadest indicator of future activity strengthened further from last month’s reading; furthermore, the firms continue to expect overall growth in new orders, shipments, and employment over the next six months.

Current Indicators Remain Negative but Climb from Long-Term Lows

After reaching a 40-year low in April, the diffusion index for current general activity rose 13 points to -43.1, its third consecutive negative reading (see Chart). The percentage of firms reporting decreases this month (58 percent) far exceeded the percentage reporting increases (15 percent). The index for new orders rose 45 points out of an all-time low for the series last month, from -70.9 to -25.7. Over 25 percent of the firms reported an increase in new orders, up from none in April, while 51 percent reported decreases, down from 71 percent last month. The current shipments index increased 44 points out of an all-time low last month, from -74.1 to -30.3. Unfilled orders held steady at -13.7, while delivery times fell 11 points to -6.7, suggesting shorter delivery times.

Firms Report Increases in Prices of Their Inputs

The prices paid diffusion index increased 13 points to 3.2. The percentage of firms reporting increases in input prices (16 percent) was higher than the percentage reporting decreases (13 percent). The current prices received index rose 8 points to a reading of -3.1, its second consecutive negative reading.

Firms Expect Own Prices to Rise Slower Than Inflation

In this month’s special questions, the firms were asked to forecast the changes in the prices of their own products and for U.S. consumers over the next four quarters. Regarding their own prices, the firms’ median forecast was for an increase of 1.0 percent, lower than the 2.5 percent that was forecast when the same question was last asked in February. The firms’ actual price change over the past year was 0.0 percent, down from 2.0 percent in the prior quarter. The firms expect their employee compensation costs (wages plus benefits on a per employee basis) to rise 2.5 percent over the next four quarters, a decrease from 3.0 percent in the previous quarter. When asked about the rate of inflation for U.S. consumers over the next year, the firms’ median forecast was unchanged at 2.0 percent. The firms’ median forecast for the long-run (10-year average) inflation rate was 3.0 percent, an increase from 2.5 percent in the previous quarter.

Most Future Indicators Remain Elevated

Despite the current weakened conditions, the respondents remained optimistic about growth over the next six months. The diffusion index for future general activity rose 7 points to 49.7 (see Chart). Over 62 percent of the firms expect increases in activity over the next six months, while 13 percent expect declines. The future new orders index increased 18 points, while the future shipments index held steady this month. The future inventories index fell 15 points to a reading of -1.4. The firms’ expectations for employment over the next six months remained positive but fell 10 points this month: Nearly 35 percent of the firms expect higher employment, while 18 percent expect lower employment.