Annual Business Outlook Survey Digest of Original 2006 Releases December 2006 Overall economic conditions in the region's manufacturing sector declined slightly in December, according to firms polled for this month's Business Outlook Survey. Indicators for general activity, new orders, and unfilled orders were negative in December. Indicators for shipments and employment, however, were positive and stronger than last month. Although firms again reported higher prices for their own manufactured goods, the survey's prices paid indicator continues to suggest diminishing cost pressures. The region's manufacturing executives were less optimistic about future activity; most future indicators decreased for the second month in a row. Indicators Are Mixed This Month The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, fell from 5.1 in November to -4.3 this month. The index has been hovering around zero since September (see Chart). This month, 20 percent of the firms reported increased activity; 25 percent reported decreased activity. The new orders and shipments indexes offer mixed signals this month. The new orders index rose one point but remained negative for the second consecutive month. The shipments index moved 13 points higher than in November. Indexes for both delivery times and unfilled orders suggest some weakening. Delivery times shortened this month: The delivery times diffusion index fell 12 points, returning the index to negative territory, and the unfilled orders index declined 17 points. Weakness in manufacturing is less evident in replies about employment and hours worked. The percentage of firms reporting an increase in employment (27 percent) was somewhat higher than that of firms reporting a decrease (19 percent); the current employment index rose eight points from its November reading. The average workweek index edged slightly lower: 20 percent of the firms reported fewer hours, and 18 percent reported increased hours. Input Price Pressures Moderate Respondents reported higher costs for inputs again this month, but increases were not as widespread as in previous surveys. The prices paid index has now fallen for five consecutive months. Thirty-one percent of the firms reported higher input prices this month; 10 percent reported lower input prices. The prices received index edged four points higher this month. Twenty-one percent of the firms reported higher prices for their final manufactured goods, up slightly from 17 percent last month. Eleven percent of the firms reported lower prices. Forecasts Are Less Optimistic Expectations for manufacturing growth over the next six months moderated again this month. The future general activity index declined from 12.4 in November to 6.7, its lowest reading in three months (see Chart). The indexes for future new orders and shipments also fell, declining three points and nine points, respectively. The future employment index, however, rose five points; 33 percent of the firms expect to increase employment over the next six months; 15 percent expect decreased employment. In a special question this month, firms were asked about their expectations for changes in various categories of input and labor costs for the upcoming year (see Special Question). A comparison to last year's responses indicates that fewer firms expect large cost increases for inputs. For example, at the end of 2005, 75 percent of the firms surveyed expected energy cost increases of 5 percent or greater in 2006; only 39 percent expect an increase of 5 percent or more in 2007. In 2005, 33 percent of firms expected cost increases of greater than 10 percent for health benefits in 2006; that has dropped slightly, to 27 percent, for 2007. Regarding wages, the largest share of firms, 86 percent, expect increases of less than 5 percent for 2007, nearly identical to the expectation last year. Summary Conditions in the region's manufacturing sector deteriorated slightly this month. Indicators for general activity and new orders suggest a slight decline, although indicators for shipments and employment improved. Input price pressures continued to moderate, but one-fifth of the firms still reported higher prices received for finished manufactured goods. Indicators for the next six months suggest that firms are less optimistic about future conditions now than they were in November. The survey's annual historical revisions, which incorporate new seasonal adjustment factors, will be released on Thursday, January 11, 2007, at noon E.T. The information will be made available at: http://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/boshistory.html ________________________________________________________________________________ Special Questions (December 2006) 1. What percentage change in costs do you expect for the following categories in 2007? Energy Other Raw Intermediate Wages Health NonHealth Materials Goods Benefits Benefits Increase more 15.2 9.0 1.4 0.0 26.9 5.2 than 10% (38.1)* (8.3) (4.9) (0.0) (32.9) (2.4) Increase 5-10% 24.1 21.8 13.5 7.5 35.9 14.3 (36.9) (41.7) (23.5) (1.2) (47.1) (16.6) Increase less 22.8 38.5 40.5 86.2 23.0 49.3 than 5% (7.1) (28.6) (42.0) (87.0) (12.9) (39.3) Stay at current 25.3 15.4 36.5 6.3 9.0 24.7 levels (5.9) (14.2) (27.2) (9.4) (3.5) (39.3) Decline less 6.3 11.5 8.1 0.0 2.6 6.5 than 5% (3.6) (3.6) (1.2) (1.2) (2.4) (2.4) Decline 5-10% 2.5 2.5 0.0 0.0 0.0 0.0 (4.8) (2.4) (1.2) (1.2) (0.0) (0.0) Decline more 3.8 1.3 0.0 0.0 2.6 0.0 than 10% (3.6) (1.2) (0.0) (0.0) (1.2) (0.0) Total 100.0 100.0 100.0 100.0 100.0 100.0 *Results of the November 2005 Special Question are in parenthesis. ________________________________________________________________________________ Business Outlook Survey Summary of Returns December 2006 December vs. November Six Months from now vs. December Prev. Prev. Diff. Inc. No ch. Dec. Diff. Diff. Inc. No ch. Dec. Diff. Index Index Index Index General Busines 5.1 20.2 50.5 24.5 -4.3 12.4 29.9 45.7 23.2 6.7 Conditions New Orders -3.7 25.9 43.9 28.3 -2.4 17.1 34.9 42.0 20.3 14.6 Shipments 6.5 39.0 38.1 20.0 19.0 23.5 34.1 43.0 19.2 14.8 Unfilled Orders -3.9 13.2 49.0 33.9 -20.7 -0.3 17.9 57.8 20.4 -2.6 Delivery Times 5.9 14.3 63.8 20.7 -6.4 -0.1 11.3 62.9 19.6 -8.3 Inventories 4.4 16.4 63.6 17.3 -0.9 -0.4 24.6 53.2 19.2 5.5 Prices Paid 26.7 30.9 57.8 10.3 20.6 33.4 53.3 34.2 12.5 40.8 Prices Received 5.7 21.2 65.1 11.3 9.9 15.7 44.0 36.2 14.0 29.9 Number of Emp. 0.2 26.6 54.7 18.7 7.9 13.2 32.8 51.7 15.1 17.7 Avg. Emp. Wrkwk 0.4 18.0 58.8 20.4 -2.4 6.4 13.9 62.9 19.0 -5.1 Capital Ex. -- -- -- -- -- 19.9 20.0 41.1 16.9 3.1 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 results reflect data received through December 18, 2006. Business Outlook Survey November 2006 Economic conditions in the region's manufacturing sector improved slightly in November, according to firms polled for this month's Business Outlook Survey. Indicators for general activity and shipments increased modestly from their readings in October, but indicators for new orders and employment weakened. Firms continued to report higher prices for inputs and their own manufactured goods, although the survey's price indicators continued to moderate. The region's manufacturing executives were slightly less optimistic about future activity, with most future indicators moderating from their readings in October. Indicators Suggests Growth The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, increased from -0.7 in October to 5.1 this month. The general activity index was slightly below zero the preceding two months, following 14 consecutive months of positive readings (see Chart 1). Thirty percent of the firms reported increased activity this month, while 25 percent reported decreased activity. The new orders and shipments indexes provide mixed signals of growth this month. The new orders index fell 17 points, to -3.7, erasing the 15-point gain in the previous month. The shipments index remained positive and edged 1 point higher than October. Delivery times lengthened this month: the delivery time diffusion index increased 15 points to its first positive reading in three months. The unfilled orders index remained negative, but increased 7 points. Evidence of weakness in manufacturing growth is suggested by replies concerning employment and hours worked this month. The percentage of firms reporting increased employment was matched by the percentage of firms reporting decreased employment ( 21 percent) and the current employment index fell nine points from its October reading. The average workweek index remained close to zero, with the percentage of firms reporting increased hours the same as the percentage reporting decreased hours (22 percent). Price Pressures Moderate Again Respondents reported higher costs for inputs again this month, but increases were not as widespread as in previous surveys. The prices paid index fell 5 points this month. The index has fallen four consecutive months and it now at its lowest reading in eight months (see Chart 2) . Thirty-six percent of the firms reported higher input prices; 9 percent reported lower input prices. Seventeen percent of firms reported higher prices for final manufactured good, down slightly from 22 percent last month. Eleven percent of the firms reported lower prices this month and the prices received index edged down 12 points to its lowest reading in 15 months (see Chart 2). Forecast Remains Moderate Expectations for future manufacturing growth moderated slightly this month, following a 17-point increase last month. Indicators for future activity, new orders, and shipments, remained positive but decreased from their readings in October. The future general activity index decreased from 16.7 to 12.4 (see Chart 1). Paralleling the decline in the future general activity index, the index for future new orders and shipments decreased 12 points and 11 points respectively. The future employment index was virtually unchanged from October. Firms' expectations for future capital spending showed a notable improvement, the diffusion index for capital expenditures increased 12 points to its highest reading in eight months. Summary Conditions in the region's manufacturing sector improved slightly this month. Indicators for general activity and shipments suggests modest growth this month, although indicators for new orders and employment weakened. Input price pressures are continuing to moderate and fewer firms reported increases for finished manufactured goods this month. Indicators for the next six months suggest that firms are slightly less optimistic about future conditions this month than in October. ________________________________________________________________________________ Business Outlook Survey Summary of Returns November 2006 November vs. October Six Months from now vs. November Prev. Prev. Diff. Inc. No ch. Dec. Diff. Diff. Inc. No ch. Dec. Diff. Index Index Index Index General Busines -0.7 29.9 45.3 24.8 5.1 16.7 35.4 35.0 23.0 12.4 Conditions New Orders 13.4 29.5 37.3 33.2 -3.7 29.2 35.5 42.6 18.5 17.1 Shipments 5.3 31.4 43.4 24.9 6.5 34.4 42.4 34.7 18.9 23.5 Unfilled Orders -11.1 18.6 58.3 22.6 -3.9 0.7 18.5 56.7 18.8 -0.3 Delivery Times -9.4 18.9 68.1 13.0 5.9 1.4 15.3 62.8 15.5 -0.1 Inventories 13.2 27.6 49.2 23.2 4.4 -8.8 28.7 38.5 29.1 -0.4 Prices Paid 32.0 35.7 54.2 9.0 26.7 33.8 42.1 41.3 8.8 33.4 Prices Received 17.8 16.5 72.7 10.8 5.7 23.5 27.8 54.5 12.0 15.7 Number of Emp. 9.4 21.2 57.9 20.9 0.2 13.1 24.7 54.8 11.5 13.2 Avg. Emp. Wrkwk -2.0 22.3 52.3 21.9 0.4 7.9 17.4 62.5 11.0 6.4 Capital Ex. -- -- -- -- -- 8.0 33.1 35.2 13.2 19.9 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 results reflect data received through November 14, 2006. Business Outlook Survey October 2006 The pace of activity in the region's manufacturing sector was generally steady in October, according to firms surveyed for this month's Business Outlook Survey. Although the index for general activity was slightly negative this month, indicators for new orders, shipments, and employment suggest some growth. Firms continued to report a rise in prices for inputs, although these cost increases were less widespread than in previous surveys. The region's manufacturing executives were more optimistic about future activity, with most indicators rebounding from their six-year lows in September. Indicators Suggest Little Growth The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, edged slightly lower, from -0.4 in September to -0.7 this month (see Chart). Twenty- two percent of the firms reported increased activity this month, but 23 percent reported decreased activity. The new orders and shipments indexes rebounded from their slightly negative readings in the previous month: The new orders index increased 15 points, and the shipments index increased 12 points. However, both the delivery time and unfilled orders indexes fell; the readings have been negative for two consecutive months. Only moderate growth in manufacturing is suggested in replies about employment this month. The current employment index fell a modest one point from its reading in September and remains at a relatively low level. Twenty-two percent of the firms reported increases in employment; 13 percent reported reductions. However, more firms reported decreases in the workweek (18 percent) than reported increases (16 percent), and the average workweek index fell seven points. Price Pressures Moderate Respondents reported higher costs for inputs again this month, but increases were not as widespread as in previous surveys. The prices paid index remained at a relatively high reading of 32 but fell six points from September (the index has now fallen for three consecutive months). Forty-two percent of the firms reported higher input prices; 10 percent reported lower input prices. Twenty-two percent of the firms reported higher prices for final manufactured goods, down slightly from 27 percent last month. The prices received index edged four points lower this month. Six-Month Forecast Rebounds Expectations for future manufacturing growth improved notably this month, following a sharp decline last month. Indicators for future activity, new orders, shipments, and employment all rose from their September readings. The future general activity index increased from -0.2 to 16.7 (see Chart); paralleling this increase, the indexes for future new orders and shipments both rose about 20 points. The future employment index increased seven points. Special Questions In special questions this month, firms were asked about the most serious problems facing their business (see Special Questions). The highest ranked problems (categories checked as relatively major) were finding qualified workers and the cost of benefits. The categories that were higher than when the question was asked last year were finding qualified workers, benefit costs, and low demand for products. Summary Growth in the region's manufacturing sector is steady or up slightly this month. Although the indicator for general activity suggests no overall growth, indexes for new orders, shipments, and employment suggest a slight improvement from last month. According to responses from this month's survey, input price pressures are still strong but are less pervasive than in the previous month. The share of firms reporting higher prices for their manufactured goods was down slightly. Indicators for the next six months suggest that firms are more confident about future conditions than they were in September. ________________________________________________________________________________ Special Questions (October 2006) To what degree does each of the following pose a current problem for your firm? | Compared to Relatively Major Relatively | Last Year Problem Minor Problem|greater same less (4) (3) (2) (1) | | | Finding Qualified Workers 36.9 31.0 17.9 14.3 | 43.2 7.4 49.4 Labor Costs-Benefits 33.3 38.1 19.0 9.5 | 42.0 2.5 55.6 Government Regulations 21.4 25.0 35.7 17.9 | 25.6 4.9 69.5 Cost of Resources 18.1 39.8 36.1 6.0 | 35.0 6.3 58.8 Taxes 17.3 32.1 39.5 11.1 | 21.8 0.0 78.2 Foreign Competition 16.5 14.1 29.4 40.0 | 30.9 3.7 65.4 Current Low Demand for | Product 15.9 22.0 22.0 40.2 | 40.2 30.5 29.3 High Rate of Capacity Utilization 10.0 20.0 32.5 37.5 | 13.9 21.5 64.6 Labor Costs-Wages 7.1 31.0 42.9 19.0 | 21.0 4.9 74.1 Availability of Resources 6.1 28.0 40.2 25.6 | 17.7 6.3 75.9 | *Degree of concern decreases from 4 (major) to 1 (minor). All numbers are percentages. ________________________________________________________________________________ October 2006 October vs. September Six Months from now vs. October Prev. Prev. Diff. Inc. No ch. Dec. Diff. Diff. Inc. No ch. Dec. Diff. Index Index Index Index General Busines -0.4 22.4 54.3 23.1 -0.7 -0.2 35.2 42.9 18.5 16.7 Conditions New Orders -1.3 34.7 41.0 21.3 13.4 8.4 45.3 37.2 16.1 29.2 Shipments -6.8 32.3 40.8 27.0 5.3 14.9 48.7 35.9 14.3 34.4 Unfilled Orders -5.3 12.1 64.7 23.2 -11.1 -3.9 17.8 60.1 17.1 0.7 Delivery Times -0.5 9.9 69.6 19.3 -9.4 -10.1 14.5 67.2 13.1 1.4 Inventories 4.2 27.2 58.9 14.0 13.2 -3.1 15.6 57.2 24.5 -8.8 Prices Paid 38.1 41.8 48.5 9.8 32.0 37.3 42.0 44.7 8.2 33.8 Prices Received 21.6 21.6 73.9 3.9 17.8 25.3 31.7 60.1 8.2 23.5 Number of Emp. 10.7 22.2 63.9 12.8 9.4 5.7 25.1 59.9 12.0 13.1 Avg. Emp. Wrkwk 5.4 16.0 65.8 18.0 -2.0 0.4 15.7 70.8 7.9 7.9 Capital Ex. -- -- -- -- -- 17.2 20.0 40.9 12.0 8.0 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 results reflect data received through October 16, 2006. Business Outlook Survey September 2006 The pace of activity in the region's manufacturing sector slowed in September, according to firms polled for this month's survey. Indicators for general activity, new orders, and shipments fell substantially from their readings in August and suggest no growth this month. Overall employment, however, was slightly higher. Firms continued to report a rise in prices for inputs, although these cost increases were less widespread than in previous surveys. The region's manufacturing executives were significantly less optimistic about future activity, with most indicators dipping to their lowest readings in six years. Growth Stalls This Month The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, dropped from 18.5 in August to -0.4 this month. This is the first negative reading in the index since April 2003, although the index registered a zero reading in June 2005 (see Chart). Twenty-seven percent of the firms reported increased activity this month, down from 35 percent in August. The percentage of firms reporting deteriorating conditions rose from 17 percent in August to 28 percent this month. The new orders and shipments indexes both fell precipitously this month: the new orders index fell 17 points, and the shipments index fell 29 points, both recording their first negative readings since April 2003. Both the delivery times and unfilled orders indexes edged lower and into negative territory, following slightly positive readings in August. The reported moderation in manufacturing growth is not as apparent in replies to questions about manufacturing employment. The current employment index improved, increasing three points from its reading in August. Twenty percent of the firms reported increases in employment; 10 percent reported reductions. More firms reported increases in the workweek (19 percent) than reported decreases (14 percent), but the average workweek index fell seven points. Cost Increases Less Widespread Respondents reported increased costs for inputs again this month, but increases were not as widespread as in previous surveys. The prices paid index remained at a relatively high reading of 38 but receded seven points from August. Forty-one percent of the firms reported higher input prices; only 3 percent reported lower prices. Twenty-seven percent of the firms reported higher prices for final manufactured goods, up slightly from the 25 percent that reported increases last month. The prices received index increased nearly five points this month. Six-Month Forecast Falls Significantly Expectations for future manufacturing growth fell sharply this month. Indicators for future activity, new orders, shipments, and employment all declined from their August readings. The future general activity index fell from 7.4 to -0.2, its first negative reading since January 2001 (see Chart). Although remaining positive, the new orders index decreased 13 points, and the shipments index decreased four points. The future employment index fell 12 points, to its lowest reading in four months. Twenty-five percent of the firms expect to increase employment over the next six months; 19 percent expect to decrease employment. Special Question In a special question this month, firms were asked about planned capital spending for the upcoming year (see Special Question). In four out of five categories of capital spending, a greater percentage of firms indicated that expenditures would be higher next year than indicated they would be lower. For investment in structures, more firms said spending would be lower (36 percent) than said it would be higher (10 percent). Diffusion indexes for these categories were all lower this month than in December 2005, when the question was last asked. The largest decrease was in the investment in structures category. Summary Overall manufacturing conditions in the region are mostly steady, and indicators for general activity, new orders, and employment suggest little or no growth this month. According to responses from this month's survey, input price pressures, though still evident, are less widespread than in the previous month. However, more firms reported higher prices for their own manufactured goods. Indicators for the next six months suggest that firms are significantly less confident about future conditions this month, and the survey's future indicators are now at their lowest readings since 2001. Special Questions (September 2006) 1. Do you expect the following capital expenditure categories in 2007 to be higher than, lower than, or the same as in the current year (2006)? Sep.2006 Dec. 2005 % % %Lower % Same % Higher Diffusion Index* Diffusion Index* Energy-saving investments 9.7 51.6 25.8 16.1 25.6 Computers and related hardware 18.3 45.2 25.8 7.5 13.5 Non-computer equipment 23.7 38.7 26.9 3.2 12.1 Software 20.4 46.2 23.7 3.2 8.1 Structures 35.5 43.0 9.7 -25.8 2.7 * Percentage of firms reporting higher expected spending minus the percentage reporting lower ex-pected spending. Summary of Returns September 2006 September vs. August Six Months from now vs. September Prev. Prev. Diff. Inc. No ch. Dec. Diff. Diff. Inc. No ch. Dec. Diff. Index Index Index Index General Busines 18.5 27.3 43.0 27.7 -0.4 7.4 29.4 28.2 29.6 -0.2 Conditions New Orders 15.7 29.5 38.6 30.9 -1.3 21.4 34.8 24.7 26.4 8.4 Shipments 22.3 25.5 40.2 32.2 -6.8 19.1 39.0 22.9 24.1 14.9 Unfilled Orders 0.6 21.6 50.1 26.9 -5.3 0.7 21.7 40.8 25.6 -3.9 Delivery Times 2.0 16.8 64.5 17.3 -0.5 5.4 10.7 58.0 20.8 -10.1 Inventories 5.6 26.2 51.7 22.0 4.2 -2.0 22.5 39.3 25.7 -3.1 Prices Paid 45.3 41.0 52.7 2.9 38.1 47.8 47.3 32.4 10.0 37.3 Prices Received 17.1 27.0 67.5 5.5 21.6 28.5 35.6 45.2 10.3 25.3 Number of Emp. 8.2 20.3 70.1 9.6 10.7 17.7 24.8 45.0 19.1 5.7 Avg. Emp. Wrkwk 12.4 19.4 61.3 13.9 5.4 3.3 14.4 61.4 13.9 0.4 Capital Ex. -- -- -- -- -- 5.9 25.2 47.3 7.9 17.2 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 results reflect data received through September 18, 2006. Business Outlook Survey August 2006 Activity in the region's manufacturing sector continued to expand, according to firms polled for this month's Business Outlook Survey. The indicator for general activity improved notably this month, and indicators for new orders, shipments, and average work hours were also up. Firms continued to report rising prices for inputs and their own manufactured goods. Despite the improvement in current activity, the region's manufacturing executives were less optimistic about future growth than last month. Continued Growth This Month The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, increased from 6.0 in July to 18.5 this month (see Chart). The index rebounded from its six-month low reading in July to its highest level since April 2005. Thirty-five percent of the firms reported increased activity, while 17 percent reported decreased activity. The new orders and shipments indexes both increased this month, by six points and 12 points, respectively. Delivery times and unfilled orders were, on balance, steady this month. Continued expansion in manufacturing is evident in replies to questions about employment and hours worked. The percentage of firms reporting increased employment (22 percent) was nearly the same as in July. The average workweek index, however, rose 15 points, from -2.8 in July to 12.4 this month. This month's special questions focused on scheduled shutdowns and production slowdowns during the summer months (see Special Questions). Thirty percent of the firms responding indicated that they normally schedule shutdowns or production slowdowns during the summer months. Thirty-four percent said they have scheduled slowdowns this year. Among the firms that scheduled slowdowns in July, the percentage of firms indicating that production decreases were larger than usual (41 percent) was substantially greater than the percentage indicating they were less than usual (14 percent). For the month of August, this gap was narrower but still positive: 17 percent indicated that decreases were greater than usual; 7 percent indicated that they were less than usual. Cost Increases and Higher Prices Reported Respondents reported increased costs for inputs again this month. Although the prices paid index remains at a relatively high level, it decreased five points. Forty-eight percent of the firms reported higher input prices, compared with 53 percent last month. Twenty-five percent of the firms reported higher prices for final manufactured goods; 8 percent reported decreases. The prices received index, at 17.1, was unchanged this month. Six-Month Forecast Is Somewhat Less Optimistic Expectations for future manufacturing growth showed some deterioration this month. The index for future activity fell from 15.4 in July to 7.4 this month (see Chart). Despite the decline, the percentage of firms expecting increases in activity over the next six months (32 percent) still exceeds the percentage expecting decreases (24 percent). The future new orders index edged two points higher, and the future shipments index was virtually unchanged. The future employment index increased five points this month: 28 percent of the firms expect to increase employment over the next six months, and 10 percent expect to decrease it. The future capital spending index dipped 11 points this month to its lowest reading in four years. Only 21 percent of the firms indicated that they expect increases in capital spending over the next six months, the lowest percentage since January 2003. Summary Indicators of current activity point to a rebound from the slower growth reported in July. Indicators for general activity, new orders, shipments, and the average workweek were all higher this month. Nearly one-half of the manufacturing firms reported paying higher prices for inputs this month, and one-quarter reported receiving higher prices for their manufactured goods. The special questions suggest that seasonal slowdowns in production have been greater than usual this summer. Indicators for the next six months suggest that firms are somewhat less optimistic about future growth than they were last month. Special Questions (August 2006) 1. Do you normally schedule plant shutdowns or production slowdowns during the summer months? Yes 30.2% No 64.0% No Response 5.8% Total 100.0% 2. Did you schedule plant shutdowns of production slowdowns during the summer months this year? Yes 33.7% No 59.3% No Response 7.0% Total 100.0% If yes, which of the following best characterizes your situation for this July and August? July 2006 August 2006 Production decreases: Greater than usual 41.4% 17.2% Less than usual 13.8% 6.9% About the same as usual 44.8% 41.4% No Response 0.0% 34.5% Total 100.0% 100.0% Summary of Returns August 2006 August vs. July Six Months from now vs. August Prev. Prev. Diff. Inc. No ch. Dec. Diff. Diff. Inc. No ch. Dec. Diff. Index Index Index Index General Busines 6.0 35.4 47.7 16.9 18.5 15.4 31.7 33.7 24.3 7.4 Conditions New Orders 10.1 34.3 47.1 18.6 15.7 19.6 41.6 29.0 20.2 21.4 Shipments 10.2 37.8 44.9 15.5 22.3 19.0 36.9 34.3 17.8 19.1 Unfilled Orders -8.1 25.7 48.5 25.0 0.6 3.3 20.2 52.7 19.5 0.7 Delivery Times -1.4 18.5 65.0 16.5 2.0 3.2 15.5 67.0 10.0 5.4 Inventories -1.8 27.1 51.5 21.5 5.6 3.2 20.5 51.7 22.6 -2.0 Prices Paid 50.3 47.8 47.5 2.6 45.3 45.6 57.1 27.9 9.3 47.8 Prices Received 17.1 24.5 65.9 7.5 17.1 36.8 38.7 42.3 10.2 28.5 Number of Emp. 12.8 22.2 63.2 14.0 8.2 12.3 27.9 52.4 10.2 17.7 Avg. Emp. Wrkwk -2.8 24.5 60.9 12.2 12.4 0.9 18.3 57.6 15.0 3.3 Capital Ex. -- -- -- -- -- 17.1 21.1 39.4 15.2 5.9 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 results reflect data received through August 15, 2006. Business Outlook Survey July 2006 Activity in the region's manufacturing sector continued to expand in July, but at a somewhat slower pace than in June. Indicators for general activity, new orders, and shipments remained positive but fell from their readings last month. Overall employment was reported higher, but the average workweek index was negative this month. Firms continued to report a rise in prices for inputs, and prices for the firms' own manufactured goods have increased in recent months. Also this month, the region's manufacturing executives were somewhat more optimistic about future activity than they were in June. Slower Growth This Month The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 13.1 in June to 6.0 this month (see Chart). The index is now at its lowest reading since January of this year. Twenty-nine percent of the firms reported increased activity; 23 percent reported decreased activity. The new orders and shipments indexes both decreased almost eight points, and more firms reported declines in unfilled orders than reported increases. Delivery times were, on balance, steady this month. The moderation in manufacturing growth is not as apparent in replies to questions about manufacturing employment. The current employment index strengthened, increasing six points from its reading in June. Twenty-one percent of the firms reported increases in employment, up from 17 percent in June. More firms reported a shorter workweek (18 percent) than reported a longer one (15 percent), and the average workweek index recorded its first negative reading in 14 months. Higher Prices Reported Respondents reported increased costs for inputs again this month. The prices paid index increased two points. Fifty-three percent of the firms reported higher input prices; only 3 percent reported lower prices. Twenty-four percent of the firms reported higher prices for final manufactured goods, up slightly from 22 percent last month; 7 percent reported decreases. The prices received index increased three points this month. Six-Month Forecast Improves But Remains Cautious Expectations for future manufacturing growth showed improvement this month: Indexes for general activity, new orders, and shipments all increased from their June readings. The future general activity index increased nine points, rebounding to approximately its March 2006 level but remaining below its average reading for the past year (see Chart); the future new orders index increased nine points; and the future shipments index increased five points. Despite the improvement in broad future indicators this month, the future employment index dipped five points, suggesting a greater degree of caution. Twenty-nine percent of the firms expect to increase employment over the next six months; 16 percent expect to decrease it. Special Questions In special questions this month, manufacturing firms were asked about their own industry's expected growth for the remainder of this year (see Special Questions). Slightly more firms expect increases in industry output in the second half than expect decreases: 39 percent of the firms indicated that their industry's output would increase in the second half of this year; 33 percent said it would decrease. However, nearly 38 percent indicated that the anticipated industry growth rate represented a deceleration from the first half of the year; a slightly lower 30 percent indicated that the anticipated rate represented accelerated growth from the first half of the year. Summary Indicators of current activity suggest continued growth of the region's manufacturing sector. Although indexes for general activity, new orders, and shipments all remained positive, they were significantly lower than in June. One half of the firms surveyed continue to report cost pressures, and nearly a quarter reported higher prices for their manufactured goods, concerns that were also reflected in the firms' comments. Indicators for the next six months suggest that firms are slightly more confident about future conditions this month, but the survey's future indicators remain below their average levels over the past year. Special Questions (July 2006) 1. What percent change do you anticipate for your industry's output in the second half of 2006 over the first half? Total Expecting Increase 38.8% Increase of 5% or more 8.8% Increase of 3-4% 20.0% Increase of 1-2% 10.0% Total Expecting Decrease 32.6% Decrease of 1-2% 13.8% Decrease of 3-4% 6.3% Decrease of 5% or more 12.5% Expecting No Change 28.6% Total 100.0% 2. Does this represent an acceleration or deceleration of growth from the first half of 2006? Total Acceleration 30.0% Significant Acceleration 3.8% Some Acceleration 26.2% Total Deceleration 37.5% Significant deceleration 35.0% Some deceleration 2.5% No Change 32.5% Total 100.0% Summary of Returns July 2006 July vs. June Six Months from now vs. July Prev. Prev. Diff. Inc. No ch. Dec. Diff. Diff. Inc. No ch. Dec. Diff. Index Index Index Index General Busines 13.1 28.5 46.7 22.5 6.0 6.8 37.7 32.2 22.4 15.4 Conditions New Orders 17.7 35.5 38.8 25.4 10.1 10.9 41.6 25.7 22.0 19.6 Shipments 17.7 32.3 45.7 22.0 10.2 14.4 41.9 26.7 22.9 19.0 Unfilled Orders -2.1 17.8 56.2 25.9 -8.1 -4.8 17.5 59.8 14.2 3.3 Delivery Times -1.2 12.8 73.0 14.2 -1.4 -8.6 14.3 67.2 11.1 3.2 Inventories -5.2 19.9 58.4 21.7 -1.8 -13.3 27.5 40.3 24.2 3.2 Prices Paid 48.7 52.9 44.5 2.6 50.3 50.0 51.5 34.2 5.9 45.6 Prices Received 14.0 23.9 68.2 6.8 17.1 31.6 40.1 48.4 3.3 36.8 Number of Emp. 6.8 20.7 71.5 7.9 12.8 16.9 28.5 47.2 16.1 12.3 Avg. Emp. Wrkwk 9.2 14.9 67.4 17.7 -2.8 -2.2 21.1 49.3 20.2 0.9 Capital Ex. 14.7 26.9 39.9 9.8 17.1 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 results reflect data received through July 18, 2006. Business Outlook Survey June 2006 Activity in the region's manufacturing sector continues to expand, according to firms polled for this month's Business Outlook Survey. Although the general activity index declined slightly this month, indicators for new orders and shipments were up notably from last month's readings, and the employment indexes also improved. Firms continued to report higher prices for inputs and for their own manufactured goods, with slightly more firms reporting higher prices for finished goods in June than in May. Despite favorable readings for current activity, the region's manufacturing executives were significantly less opti- mistic this month about future growth. Expansion Continues The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 14.4 in May to 13.1 this month (see Chart). Twenty-seven percent of the firms reported increases in activity; 14 percent reported decreases. The new orders index increased 15 points from its relatively low reading of 2.7 last month. The new orders index is now several points higher than its average since the beginning of the year. The shipments index increased six points this month. Slightly more firms reported declines in unfilled orders than reported increases. Marginally more firms reported shorter delivery times than reported longer delivery times. For the third consecutive month, more firms reported a decline in inventories than reported an increase. The expansion in manufacturing is evident in replies to questions about em- ployment and hours worked. The current employment index remained positive and increased six points from its relatively low reading last month. Seventeen per- cent of the firms reported increases in employment, nearly the same as last month. On balance, the workweek continued to increase this month: More firms reported a longer workweek (17 percent) than reported a shorter one (8 percent). Higher Prices for Manufactured Goods Although, on balance, respondents reported higher production costs again this month, the prices paid index fell six points, the first decrease in three months. Fifty-five percent of the firms reported higher input prices, down from 58 percent in May. Higher prices for final manufactured goods were reported by 22 percent of the firms, up from 16 percent last month. The prices received index increased four points this month. Six-Month Forecasts Are Less Optimistic Expectations for future manufacturing growth showed significant deterioration this month; indexes for general activity, new orders, and shipments all decreased from their May readings. The future general activity index dropped 16 points, reaching its lowest level since January 2001 (see Chart). The new orders index fell 13 points; the shipments index fell four points. Despite the decline in broad future indicators this month, the future employment index increased 12 points from its relatively low reading in May. Thirty-one percent of the firms expect to increase employment over the next six months; 15 percent expect to decrease it. In special questions this month, firms were asked about changes in employment expected over the next six to 12 months (see Special Questions). Forty-nine per- cent of respondents indicated that employment would increase; this is slightly higher than the 43 percent who anticipated increased employment at this time last year. Some upward movement in wages is evident in responses regarding wage rates being offered to new hires or contracts. Sixty-seven percent of the firms indicated that wage rates are increasing for new hires. Most of the increases were between 1 percent and 3 percent, but 23 percent of the firms increasing wages indicated that the percentage increases are higher than they were 12 months ago. Summary Indicators of current activity all point to continued growth of the region's manufacturing sector this month. Indexes for general activity, new orders, and shipments all remained positive, and the employment indexes showed some improvement this month. More than half of the firms surveyed continue to report cost pressures, and the percentage of firms reporting higher prices for their manufactured goods increased slightly this month. Indicators for the next six months suggest that firms are less positive about the prospect of growth than they were a month ago, yet nearly one-third of survey participants expect employment gains over the next six months. Special Questions (June 2006) 1. What percent change in employment do you plan over the next six to 12 months? June 2006 June 2005 Total Increase 49.4 43.0% Increase of 0-3% 30.4% 21.5% Increase of 4-6% 16.4% 13.9% Increase of 7-9% 1.3% 6.3% Increase of 10%+ 1.3% 1.3% Total Decrease 13.9% 11.4% Stay at current levels 36.7% 45.6% Total 100.0% 100.0% 2. How much are you increasing wage rates for new hires or contracts? Total Increase 66.6% Increase of 1-3% 54.3% Increase of 4-6% 11.1% Increase of 7-9% 0.0% Increase of greater than 9% 1.2% No Increase 27.2% No Response 6.2% If you are increasing wage rates, is the percentage increase higher, lower, or the same as 12 months ago? Higher 22.8% Lower 8.8% Same 68.4% June 2006 June vs May Six Months from now vs. June Prev. Prev. Diff. Inc. No ch. Dec. Diff. Diff. Inc. No ch. Dec. Diff. Index Index Index Index General Business Conditions 14.4 27.3 53.9 14.3 13.1 22.5 30.9 38.4 24.1 6.8 New Orders 2.7 31.8 52.1 14.1 17.7 24.3 35.1 34.3 24.2 10.9 Shipments 11.7 30.7 55.9 13.0 17.7 18.4 37.7 32.0 23.3 14.4 Unfilled Orders -2.2 16.8 62.1 18.8 -2.1 3.4 21.2 46.0 25.9 -4.8 Delivery Times 9.6 11.3 72.6 12.6 -1.2 3.2 11.5 61.5 20.1 -8.6 Inventories -3.9 17.7 55.3 22.9 -5.2 5.8 16.1 48.6 29.3 -13.3 Prices Paid 55.3 54.9 38.9 6.2 48.7 58.2 57.3 27.8 7.4 50.0 Prices Received 10.3 22.3 67.2 8.3 14.0 37.6 36.5 51.0 4.9 31.6 Number of Emp. 1.1 16.7 72.2 9.8 6.8 4.8 31.3 46.1 14.5 16.9 Avg. Emp. Wrkwk 8.5 17.0 73.5 7.8 9.2 5.4 16.4 59.4 18.6 -2.2 Capital Ex. -- -- -- -- -- 19.3 26.1 44.9 11.3 14.7 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 results reflect data received through June 13, 2006. May 2006 Activity in the region's manufacturing sector continues to expand, according to firms polled for this month's Business Outlook Survey. The general activity index improved slightly this month, but other indicators of current activity were down from their readings last month. The percentage of firms reporting higher prices for inputs was up sharply, but the percentage of firms reporting higher prices for finished goods was slightly less than in April. The region's manufacturing executives were less optimistic about future growth and employment than in recent months. Expansion Continues But Employment Stalls The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, increased from 13.2 in April to 14.4 this month (see Chart). Twenty-nine percent of the firms reported increases in activity; 15 percent reported decreases. Although still positive, the new orders index fell almost 10 points, to its lowest reading since last September. The shipments index fell seven points, to its lowest reading in five months. For the second consecutive month, more firms reported declines in inventories than reported increases. Employment indicators were notably weaker this month. The current employment index fell almost 21 points. The percentage of firms reporting increased employment (18 percent) was nearly matched by that of firms reporting lower employment (17 percent). More firms reported a longer workweek than reported a shorter one, but the workweek diffusion index edged down slightly. Input Prices Rise This Month Firms reported higher production costs this month. Fifty-eight percent of the firms reported higher input prices, compared to 35 percent in April. The prices paid index rose 26 points, to its highest reading since October 2005. Despite the report of higher production costs, only 16 percent of the firms reported higher prices for final manufactured goods, down from 24 percent last month. The prices received index fell five points. In special questions this month, firms were asked about the impact of recent higher costs on expected price increases for their products over the next three months (see Special Questions). About 39 percent of respondents expect steady prices for their own goods over the next three months, almost identical to the percentage who anticipated steady prices at this time last year. Thirty-one percent of the firms expect higher prices over the next three months, down from 45 percent at this time last year. About 19 percent of the firms are currently experiencing shortages or delayed delivery of critical raw materials, compared to 27 percent who indicated shortages last year. Nearly 31 percent of those experiencing shortages or delivery delays indicated that these problems have affected rates of production. Six-Month Indicators Fall Although still generally favorable, the respondents' six-month forecast for manufacturing growth weakened somewhat this month. The future general activity index decreased six points (see Chart), and the future new orders and shipments indexes fell 13 points and 22 points, respectively. The future employment index dropped 17 points, to its lowest reading since August 2002. Summary Indicators of current activity all point this month to continued growth of the region's manufacturing sector. However, indexes for new orders, shipments, and employment were weaker. Price pressures returned this month, with a significant increase in the percentage of firms reporting higher production costs. Firms expect continued growth in business over the next six months but are much less optimistic about future employment growth. Special Questions (May 2006) 1. Many firms have been reporting price increases for raw materials and energy since the beginning of the year. What impact will these recent price increases have on the prices of your finished products over the next three months? May 2006 May 2005 May 2004 We expect declining prices for our goods. 2.5% -- -- We expect steady prices for our goods: 39.4% 40.9% 39.3% We expect price increases of approximately: 0-5% 17.3% 33.3% 25.6% 5-10% 12.4% 10.8% 21.4% 10-15% 1.2% 1.0% 8.6% %No response 27.2% 14.0% 5.1% Total 100.0% 100.0% 100.0% Since the beginning of the year, we have already increased our prices by: May 2006 May 2005 May 2004 0-5% 22.2% 24.7% 26.5% 5-10% 8.6% 16.1% 14.5% 10-15% 0.0% 3.2% 4.3% > 15% 1.2% 0.0% 3.4% Total 32.0% 44.0% 48.7% 2. Are you currently experiencing shortages or delayed delivery of any critical raw materials?* May 2006 May 2005 May 2004 Yes 19.4% 26.9% 39.1% No 80.6% 73.1% 60.9% If yes, have these problems affected rates of production? May 2006 May 2005 May 2004 Yes 30.8% 55.0% 55.6% No 69.2% 45.0% 44.4% * Some raw materials cited were stainless steel, raw steel, bearings, aluminum castings, some electronic components, particle board, castings, copper wire, sweetener, furniture foam, plywood, plastic, copper, lead, and fuel. Summary of Returns May 2006 May vs. April Six Months from now vs. May Prev. Prev. Diff. Inc. No ch. Dec. Diff. Diff. Inc. No ch. Dec. Diff. Index Index Index Index General Busines 13.2 29.4 55.3 15.0 14.4 28.2 46.7 24.2 24.1 22.5 Conditions New Orders 12.2 23.6 52.9 20.9 2.7 37.4 47.3 21.5 23.0 24.3 Shipments 19.0 28.4 53.8 16.8 11.7 40.7 42.7 24.2 24.2 18.4 Unfilled Orders 7.0 14.1 68.2 16.3 -2.2 5.8 23.3 52.0 19.9 3.4 Delivery Times -4.1 13.8 81.3 4.1 9.6 -0.2 16.7 66.1 13.5 3.2 Inventories -8.8 11.6 72.1 15.5 -3.9 0.0 27.4 45.1 21.6 5.8 Prices Paid 29.0 57.6 40.0 2.4 55.3 42.9 63.2 28.1 5.0 58.2 Prices Received 15.4 16.4 76.5 6.1 10.3 14.2 44.2 43.9 6.6 37.6 Number of Emp. 21.7 18.3 64.0 17.2 1.1 21.8 24.3 49.9 19.5 4.8 Avg. Emp. Wrkwk 9.3 18.4 71.7 9.9 8.5 7.1 20.3 57.3 14.9 5.4 Capital Ex. -- -- -- -- -- 16.8 26.4 45.1 7.1 19.3 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 results reflect data received through May 16, 2006. April 2006 Activity in the region's manufacturing sector continues to expand, according to firms polled for this month's Business Outlook Survey. The general activity index improved slightly this month. Indicators for new orders and shipments were down from their readings of last month but remained positive. The employment index was sharply higher this month, and the average hours worked improved. Firms continued to report higher prices for inputs and for their own manufactured goods, with slightly more firms reporting higher prices for finished goods in April than in March. The region's manufacturing executives were somewhat more optimistic about future growth this month than in recent months. Expansion Continues The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, increased from 12.3 in March to 13.2 this month (see Chart). Twenty-five percent of firms reported increases in activity; 12 percent reported decreases. The new orders index fell nine points this month, and the shipments index fell five points. Both indexes remain positive and are only slightly below their average levels of the past three months. Firms, on balance, reported higher unfilled orders but shorter delivery times this month. In April, for the first time in six months, more firms reported declines in inventories than increases. Continued expansion in manufacturing is evident in replies to questions about employment and hours worked. The current employment index jumped 16 points, and the percentage of firms reporting increased employment rose from 17 percent in March to 28 percent this month. On balance, the workweek continued to increase this month: More firms reported a longer workweek (16 percent) than reported a shorter one (6 percent), and the workweek diffusion index increased three points. In special questions this month firms were asked to characterize the underlying demand for their manufactured goods over the past three months (see Special Questions). Sixteen percent of the firms indicated that demand had increased significantly, but the largest segment (47 percent) said that demand had increased only modestly. Only 10 percent of the firms indicated modest declines, and 26 percent reported no change in demand over the last three months. The percentage of firms reporting that demand was greater than expected was nearly twice as large as the percentage saying demand was less than expected (35 percent versus 18 percent). Higher Prices Reported Respondents reported higher production costs again this month. Thirty-five percent of the firms reported higher input prices, up from 23 percent in March. The prices paid index climbed 12 points, the first increase in six months. Higher prices for final manufactured goods were reported by 24 percent of the firms, up from 19 percent last month. The prices received index remained at 15.4, after falling steadily for five consecutive months. Six-Month Forecasts Are More Optimistic Expectations for future manufacturing growth improved this month; indexes for general activity, new orders, shipments, and employment all increased from their March readings. The future general activity index increased 14 points (see Chart); the new orders index increased six points; and the shipments index jumped 19 points. The future employment index increased modestly (three points), with 32 percent of the firms expecting to increase employment over the next six months and 10 percent expecting to decrease employment. Summary Indicators of current activity all point to continued growth of the region's manufacturing sector this month: Indexes for general activity, new orders, and shipments all remained positive, and the employment index showed improvement. A large percentage of the firms continue to report price pressures. Manufacturing firms continue to anticipate increases in activity over the next six months, with most indicators of future growth showing improvement from their March readings. Special Questions (April 2006) 1. Over the past three months, how would you characterize the underlying demand for your manufactured products?* % Increasing significantly 16.1 Increasing modestly 47.1 No change 26.4 Decreasing modestly 10.4 Decreasing significantly 0.0 Total 100.0 2. How does the current underlying demand for your products compare to what you expected three months ago? Greater than expected 34.5 Less than expected 18.4 About what was expected 47.1 Total 100.0 * Firms were instructed to exclude any purely seasonal effect. April 2006 April vs. March Six Months from now vs. April Prev. Prev. Diff. Inc. No ch. Dec. Diff. Diff. Inc. No ch. Dec. Diff. Index Index Index Index General Busines 12.3 25.3 61.9 12.1 13.2 14.6 44.1 33.9 15.9 28.2 Conditions New Orders 20.8 30.6 51.0 18.4 12.2 31.8 48.1 36.3 10.7 37.4 Shipments 24.3 32.3 54.4 13.3 19.0 22.2 50.2 35.1 9.5 40.7 Unfilled Orders 5.7 21.7 62.6 14.6 7.0 1.2 22.5 56.1 16.7 5.8 Delivery Times 3.7 11.7 68.6 15.8 -4.1 -4.0 13.7 67.8 13.9 -0.2 Inventories 11.1 16.6 57.9 25.4 -8.8 -8.3 21.5 52.1 21.5 0.0 Prices Paid 17.2 35.2 58.0 6.2 29.0 31.0 48.8 39.5 5.9 42.9 Prices Received 15.4 23.6 68.3 8.2 15.4 30.0 26.9 55.0 12.7 14.2 Number of Emp. 5.4 27.9 65.9 6.2 21.7 19.0 32.1 53.4 10.3 21.8 Avg. Emp. Wrkwk 6.3 15.5 74.1 6.2 9.3 4.7 21.6 56.6 14.5 7.1 Capital Ex. 23.7 23.6 48.7 6.7 16.8 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 results reflect data received through April 20, 2006. March 2006 Activity in the region's manufacturing sector continues to grow in March, according to firms surveyed for this month's Business Outlook Survey. Although the general activity index decreased slightly this month, indicators for new orders and shipments showed improvement. Firms continued to report higher prices for inputs and their own manufactured goods, although the survey's price indicators continued to moderate. The region's manufacturing executives remain generally optimistic about growth in business at their firms over the next six months, although future indicators suggest less optimism than last month. Manufacturing Expansion Continues The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 15.4 in February to 12.3 this month. Twenty-two percent of the firms reported increases in activity; 10 percent reported decreases. Other broad indicators rose moderately, however. The new orders index increased eight points this month, and the shipments index increased two points. Firms, on balance, reported higher unfilled orders and longer delivery times again this month, although these two indexes were lower than in last month. Continued expansion in manufacturing is evident in replies to questions about employment and hours worked. However, the percentage of firms reporting increased employment (17 percent) was somewhat lower than in February (24 percent). The current employment index fell six points this month. On balance, the workweek continued to increase this month: More firms reported a longer workweek (17 percent) than reported a shorter one (11 percent). Price Pressures Continue to Moderate Firms reported higher production costs again, although price pressures moderated for the fifth consecutive month. Twenty-three percent of the firms reported higher input prices, but this was down from 36 percent in February and 53 percent in January. The prices paid index fell 13 points and has dropped 50 points over the past five months (see Chart). Higher prices for final manufactured goods were reported by 19 percent of the firms, slightly lower than the 24 percent that reported them last month. The prices received index, at 15.4, was down three points from February and has fallen steadily for five consecutive months (see Chart). Six-Month Forecasts Are Less Optimistic Expectations for future manufacturing growth deteriorated somewhat this month; however, expectations for new orders, shipments, and employment remain favorable. The future general activity index fell 17 points, but the new orders index fell only six points and the shipments index fell five points. The future employment index decreased three points, but a larger percentage of firms expect to increase payrolls over the next six months (31 percent) than expect to decrease them (12 percent). In special questions this month firms were asked about their experiences filling recent job openings (see Special Questions). Fifty-one percent of the firms indicated that they had recently experienced problems filling job openings because applicants lacked sufficient skills. This is higher than in 2004, when 42 percent of the firms with job openings reported problems filling positions. The most frequently cited skills that applicants lacked were the use of production machines; specific plant operator skills; and basic skills in reading, writing, and math. Respondents were asked about whether the gap between required skills and available skills has changed over time. Nearly 16 percent of the firms indicated that the gap was greater than it was six months ago, and 19 percent said that it was greater than a year ago. Summary Indicators of current activity all point to continued growth of the region's manufacturing sector this month: Indexes for general activity, new orders, shipments, and employment all remained positive. Price pressures remain but continue to show a moderating trend. Firms expect continued improvement of manufacturing business over the next six months, even though expectations were not as strong as in February. Special Questions (March 2006) 1. Has your firm experienced problems filling job openings in the past three months because applicants did not have sufficient qualifications? March 2006 April 2004 Yes 51.4% 42.0% No 37.2% 36.1% Have had no openings 11.4% 21.9% Total 100.0% 100.0% If yes, what are the three most significant skill categories that applicants are lacking? Percent choosing specific skill category* March 2006 April 2004 Skills in the use of production machines or tools 92.6% 76.4% Specific plant and system operator skills 66.6% 50.9% Basic skills (reading, writing, math) 55.6% 40.0% Supervisory, management, or admin. skills 51.9% 23.6% English language skills 18.5% 14.5% Computer skills 22.2% 9.1% *The totals sum to more than 100% because each participant could choose three categories. 2. In general, how has the gap between required skills and available skills changed over the following periods? Now, compared Now, compared to six months ago to one year ago Larger 15.9% 19.4% Smaller 6.3% 11.3% Same 77.8% 69.3% 100.0% 100.0% March 2006 Summary of Returns March vs. February Six Months from now vs. March Prev. Prev. Diff. Inc. No ch. Dec. Diff. Diff. Inc. No ch. Dec. Diff. Index Index Index Index General Busines 15.4 22.4 63.6 10.1 12.3 31.1 31.6 41.9 17.0 14.6 Conditions New Orders 12.5 30.4 54.0 9.6 20.8 38.1 46.5 29.8 14.6 31.8 Shipments 22.5 34.8 50.6 10.5 24.3 27.6 39.6 35.9 17.4 22.2 Unfilled Orders 10.2 16.9 67.7 11.2 5.7 2.8 19.8 53.6 18.6 1.2 Delivery Times 8.6 14.8 72.7 11.1 3.7 -1.9 13.1 62.8 17.1 -4.0 Inventories 9.3 26.8 54.2 15.8 11.1 1.4 23.3 37.7 31.7 -8.3 Prices Paid 30.5 22.7 67.1 5.5 17.2 33.0 38.9 48.1 7.9 31.0 Prices Received 18.2 18.9 74.9 3.5 15.4 24.2 37.3 50.3 7.3 30.0 Number of Emp. 11.3 17.0 67.3 11.5 5.4 22.4 31.0 50.9 12.0 19.0 Avg. Emp. Wrkwk 8.7 17.0 64.4 10.7 6.3 11.5 17.1 60.7 12.4 4.7 Capital Ex. -- -- -- -- -- 23.5 31.7 41.4 8.0 23.7 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 results reflect data received through March 14, 2006. Business Outlook Survey February 2006 The pace of activity in the region's manufacturing sector picked up in February, according to firms surveyed for this month's Business Outlook Survey. The general activity index improved notably this month, and indicators for new orders and shipments also showed some improvement. Firms continued to report rising prices for inputs and their own manufactured goods, but survey indexes suggest price pressures continued to moderate. The region's manufacturing executives remain optimistic about future growth in their sector. Manufacturing Expansion Continues The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, increased from 3.3 in January to 15.4 this month, its highest reading since August of last year (see Chart). Thirty-two percent of the firms reported increases in activity; 17 percent reported decreases. Other broad indicators rose more moderately, however. The new orders index rose one point this month, and the shipments index rose four points. Firms, on balance, reported more unfilled orders and longer delivery times. Continued expansion in manufacturing is evident in replies to questions about employment and hours worked. The percentage of firms reporting increased employment (24 percent) was higher than in January (19 percent). The current employment index, which was virtually unchanged from January, remained at a healthy level. On balance, the workweek continued to increase this month: The number of firms reporting a longer workweek (21 percent) was larger than the number reporting a shorter one (13 percent). Price Pressures Moderate Slightly Again Firms reported higher production costs again this month, although price pressures moderated for the fourth consecutive month: 36 percent reported higher input prices; however, this was down from 53 percent in January. The prices paid index fell 14 points and has fallen 36 points over the past four months. Higher prices for final manufactured goods were reported by 24 percent of the firms, slightly below last month's 27 percent. The prices received index, at 18.2, was down four points from January and has fallen steadily for four months. Six-Month Forecasts Remain Optimistic Expectations for future manufacturing growth were essentially unchanged from the prior month and remain at healthy levels–-the future general activity index increased by two points (see Chart). Other broad indicators of future growth also changed little. The future new orders index was virtually the same as in January, and the future shipments index fell three points. The future employment index rose three points, but more than three times as many firms anticipate increasing payrolls (33 percent) as expect to decrease them (10 percent). In special questions this month, firms were asked about changes in the size of their operations in the three-state region over the last five years. Forty-four percent of the firms indicated that their workforce was larger than it was five years ago, while 39 percent reported having a smaller workforce than five years ago. Firms were also asked to provide a probability that they would relocate some or all of their operations out of the region over the next five years. The average probability of relocating some operations was nearly 16 percent, while the average probability of relocating all operations was much lower, about 2 percent. Summary Indicators of current activity point to a pickup in growth of the region's manufacturing sector this month. Indicators for general activity, new orders, and shipments all increased from their January readings. Price pressures remain but continue to show a moderating trend. Firms expect continued improvement in manufacturing business over the next six months, and one-third of the firms indicated that they will increase employment. Special Questions (February 2006) 1. How does the size of your workforce in the tri-state region (PA, NJ, DE) compare with that of five years ago? Percent Larger than 5 years ago 44.4 Smaller than 5 years ago 38.9 About the same 16.7 Total 100.0 2. What is the probability that you will relocate some or all of your operations out of the tri-state region over the next 5 years? Average Probability Probability of relocating some operations 15.7% Probability of relocating all operations 1.9% 3. How would you characterize your manufacturing establishment? Percent Single-site manufacturing plant 45.9 Headquarters and manufacturing site of multi-site firm 39.2 Single manufacturing plant that is part of a multi-site firm 9.5 Other 5.4 Total 100.0 ____________________________________________ February 2006 Summary of Returns February vs. January Six Months from now vs. February Prev. Prev. Diff. Inc. No ch. Dec. Diff. Diff. Inc. No ch. Dec. Diff. Index Index Index Index General Busines 3.3 32.4 49.7 17.0 15.4 28.7 42.9 42.1 11.8 31.1 Conditions New Orders 11.1 39.8 30.7 27.3 12.5 38.5 49.4 39.2 11.3 38.1 Shipments 18.6 40.6 36.8 18.1 22.5 30.8 41.5 40.3 13.9 27.6 Unfilled Orders -0.9 30.0 47.4 19.8 10.2 7.9 18.1 60.2 15.3 2.8 Delivery Times 8.6 23.2 62.1 14.6 8.6 -1.2 14.9 63.8 16.7 -1.9 Inventories 9.1 18.0 71.6 8.7 9.3 -0.9 20.7 54.8 19.3 1.4 Prices Paid 44.9 35.6 59.4 5.1 30.5 34.1 41.1 47.5 8.1 33.0 Prices Received 21.9 23.8 68.5 5.6 18.2 25.3 31.0 58.2 6.9 24.2 Number of Emp. 11.7 23.5 64.3 12.1 11.3 19.5 32.7 54.8 10.4 22.4 Avg. Emp. Wrkwk 8.1 21.4 65.8 12.7 8.7 10.7 20.4 65.1 8.9 11.5 Capital Ex. -- -- -- -- -- 18.9 30.5 34.7 7.0 23.5 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 results reflect data received through February 14, 2006. Business Outlook Survey Summary of Returns January 2006 Activity in the region's manufacturing sector continued to expand at the beginning of 2006. All of the broad indicators of activity remained positive in January. Although the general activity index decreased from last month, indexes for new orders, shipments, and employment showed improvement. Firms continued to report higher prices for inputs and final manufactured goods, although the survey's price indictors moderated slightly. The region's manufacturing executives remained generally optimistic about the future growth of their businesses. Manufacturing Growth Continues The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, fell from a revised reading of 10.9 in December to 3.3 this month (see Chart). (footnote) Twenty-nine percent of the firms reported increases in the level of general business activity; 26 percent reported deceases. Indicators for new orders and shipments, however, increased from their readings in December: The new orders index rose from a revised reading of 5.8 in December to 11.1, and the shipments index increased from 9.4 in December to 18.6. On balance, delivery times were longer this month and unfilled orders were nearly steady. Continued expansion in manufacturing is evident in replies to questions about employment and hours worked. The employment index increased four points, and the average employee workweek index rose three points. Nineteen percent of firms reported increases in employment this month, and the same percentage of firms reported an increase in average work hours. Higher Prices Still Evident But Indexes Moderate Some Firms reported higher production costs again this month, although the prices paid diffusion index fell for the fourth consecutive month, from a revised reading of 47.1 in December to 44.9 this month. Still, 53 percent of the manufacturers reported increases in input prices this month; 8 percent reported declines. Higher prices for final manufactured goods were also relatively widespread this month. Twenty-seven percent of the firms reported higher prices for their own goods, although this was down from about 33 percent in December. The prices received index correspondingly fell eight points. Firms' expectations for price increases over the next six months moderated in January. The future prices paid index declined 14 points, to its lowest reading in seven months. The future prices received index fell seven points, to its lowest reading in eight months. Forecasts Slightly Less Optimistic Overall expectations for the next six months, while remaining generally optimistic, diminished slightly this month. The index for future activity fell from a revised reading of 33.4 in December to 28.7 this month (see Chart). The future shipments index decreased five points, while the future new orders index was mostly flat. Over 27 percent of the firms expect to increase employment over the next six months; 8 percent expect to decrease it. The future employment index paralleled the decline in other future indicators, falling five points. In special questions this month, firms were asked about their expectations for spending on new plant and equipment over the next six months relative to actual spending during the past 12 months (see Special Questions, page 3). Over 39 percent of the firms indicated they plan to increase capital spending; 15 percent said they planned a decrease-nearly the same percentages as when the same question was posed to survey participants in June and only slightly less optimistic than one year ago. The most frequently cited reasons for planned increases in spending were the need to replace capital goods, expected growth in sales, and a high current capacity utilization rate. One-third cited the need to replace information technology and one-third the need to invest in energy-saving equipment. Firms were also asked about anticipated employment increases over the same six- to 12-month period. Nearly 43 percent of the firms indicated that they plan to increase employment, which is essentially unchanged from when the question was asked in June. Nearly 25 percent of the firms expect an increase of up to 3 percent, 11 percent expect increases of between 4 and 6 percent, and 7 percent expect employment increases of 7 percent or more. Summary Indicators continue to point toward expansion of the region's manufacturing sector. All of the survey's broad indicators remained positive this month. Firms continued to report increased costs for inputs and higher prices for manufactured goods, although the respective indexes edged down for the third consecutive month. Price expectations for the next six months showed some moderation this month. Most broad indicators of future conditions fell somewhat from their readings in December but still reflect general optimism about continued improvement in manufacturing conditions during the next six months. ____________ Footnote: The survey's annual revisions, which incorporate new seasonal adjustment factors, were released on January 12, 2006. The information is available at: http://www.phil.frb.org/research-and-data/regional-economy/business-outlook-survey/historicalrevisions2006.html. Revisions for selected series from 1998 to 2005 are listed on pages 3-4 of this release (see pdf version of this report) Special Questions (January 2006) 1. Do you expect your firm's spending on new plant and equipment over the next 6 to 12 months to increase, decrease, or remain more or less unchanged relative to your actual spending over the past 6 to 12 months?? January 2006 June 2005 (%) January 2005 (%) January 2004 (%) (%) (%) (%) (%) Increase 39.2 39.8 43.8 58.2 Decrease 15.2 13.3 15.7 12.7 No Change 45.6 47.0 40.4 29.1 2. What are the major factors behind your plan to increase capital spending? (Top five chosen)* January 2006 June 2005 % % Need to replace other capital goods 51.3 44.1 Expected growth of sales is high 48.7 55.8 Capacity utilization is currently high 46.2 35.3 Need to replace information technology equipment 33.3 23.5 Energy-saving investment 33.3 n.a. *Percentages may add to greater than 100 because firms were asked to indicate more than one factor if applicable. 3. What percentage change in employment is anticipated over the next six to 12 months? January 2006 June 2005 % % Increase of 0-3% 24.7 21.5 Increase of 4-6% 11.0 13.9 Increase of 7-9% 2.7 6.3 Increase of 10% or more 4.1 1.3 Total Increase ................... 42.5% ...........43.0% Stay at current levels 43.8% 45.6% Decrease of 0-3% 5.5 5.1 Decrease of 4-6% 6.8 0.0 Decrease of 7-9% 0.0 2.5 Decrease of 10% or more 1.4 3.8 Total Decrease 13.7% 11.4% January 2006 January vs. December | Six Months from now | vs. January | Prev. |Prev. Diff. Inc. No ch. Dec. Diff. |Diff. Inc. No ch. Dec. Diff. Index* Index |Index* Index | General Busines 10.9 28.9 45.6 25.5 3.3| 33.4 35.8 48.9 7.1 28.7 Conditions | | New Orders 5.8 35.2 39.7 24.0 11.1| 39.0 46.9 34.7 8.4 38.5 | Shipments 9.4 36.9 40.9 18.3 18.6| 35.3 43.8 34.0 13.0 30.8 | Unfilled Orders -1.5 23.1 51.7 24.0 -0.9| 9.0 20.6 57.6 12.7 7.9 | Delivery Times 0.5 20.0 65.5 11.5 8.6| -2.7 12.3 64.5 13.5 -1.2 | Inventories 4.1 24.2 60.6 15.2 9.1| 8.9 18.8 53.0 19.8 -0.9 | Prices Paid 47.1 52.7 39.5 7.8 44.9| 47.6 38.0 47.4 3.8 34.1 | Prices Received 29.7 26.5 68.0 4.7 21.9| 32.5 31.9 51.4 6.6 25.3 | Number of Emp. 7.9 18.5 70.8 6.8 11.7| 24.2 27.2 57.2 7.6 19.5 | Avg. Emp. Wrkwk 5.4 18.7 70.7 10.6 8.1| 6.9 20.0 62.9 9.3 10.7 | Capital Ex. -- -- -- -- -- | 15.5 28.4 41.1 9.5 18.9 | * December data were revised, along with historical data, to incorporate new seasonal factors (see note on front page). 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 results reflect data received through January 17, 2006