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/econ/bos/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