March 2005 Activity in the region's manufacturing sector continues to expand, but at a slower rate than in February. Indicators for general activity, shipments, and employment show a more moderate pace of growth. Firms continue to report a rise in prices for inputs and for their own finished goods, although the survey’s price indicators have moderated from recent highs. The region’s manufacturing executives were slightly more optimistic this month than in February. Manufacturing Expansion Continues The diffusion index of current activity, the broadest measure of manufacturing conditions, decreased from 23.9 in February to 11.4 in March. This is its lowest reading in 20 months (see Chart). More firms reported increases in activity (27 percent) than reported decreases (15 percent). A large percentage (58 percent) reported no change in general activity compared to February. The new orders and shipments indexes remained positive this month, but the new orders index increased two points, while the shipments index fell nine points. Indicators for unfilled orders and delivery times changed little from February. The moderation in manufacturing activity this month is evident in the responses about employment and hours worked. The percentage of firms reporting increased employment was higher than that reporting lower employment for the 18th straight month. But the current employment index fell to its lowest reading in 16 months, and the current workweek index also fell to its lowest level in four months. In special questions this month, firms were asked about the actual level of their inventories over the last three months and the economic factors that influenced them (see Special Questions). Firms reporting higher levels of inventory (41 percent) exceeded those reporting lower levels (27 percent). Of the firms reporting higher levels, 32 percent replied that lower than anticipated sales had a significant effect on inventories; 9 percent indicated that expected higher energy prices had a slight impact on the larger inventories, and 24 percent thought anticipated higher material costs had a slight impact. Among firms reporting lower inventories, 23 percent said that greater than anticipated sales had been a significant factor. Price Indexes Moderate Although firms continue to report higher production costs, the index for input prices fell notably again this month: 36 percent of firms reported higher prices for inputs, substantially lower than February (49 percent)and January (67 percent). The diffusion index for prices paid is at its lowest reading in 16 months. Firms continue to report higher prices for their own manufactured goods: 23 percent reported higher prices; 8 percent reported lower. The diffusion index for prices received is at its lowest reading in 11 months. Expectations about future prices moderated this month. The future prices paid index decreased 21 points, and the future prices received index decreased 18 points. Manufacturing Expansion Expected to Continue Overall expectations for the next six months improved slightly in March. The future general activity index increased from 26.5 to 29.8, its highest point in three months but still below readings for most of last year (see Chart). Other future indicators showed similar improvement: the future new orders index increased six points and the future shipments index increased nine points. The future inventory index increased notably, from -16.9 in February to 1.0 this month. The future employment index increased from 11.8 in February to 21.5 in March. On balance, firms that expect average work hours to increase slightly edged out those that expect them to decrease. Firms’ capital spending plans have shown some improvement in recent months. The future capital spending index rose to its highest point since September 2000. Summary Indicators continue to point to expansion of the region's manufacturing sector, although indicators for general activity, shipments, employment, and work hours fell from their readings in February. Firms continue to report higher costs for inputs and manufactured goods this month, but the survey’s price indexes moderated from their recent highs. Most broad indicators of future conditions edged higher this month with the outlook for employment and capital spending showing notable improvement. Special Questions (March 2005) 1. Over the past three months has your actual level of inventories: Increased 40.5% Decreased 27.4% Not changed 32.1% Total 100.0% 2. To what extent have any of the factors below influenced your actual level of inventories? For those reporting increases: Significant Slight No Effect Sales of products less than anticipated 32.4% 8.8% 58.8% Sales of products greater than anticipated 14.7% 20.6% 64.7% Anticipation of higher energy costs 0.0% 8.8% 91.2% Anticipation of lower energy costs 0.0% 0.0% 100.0% Anticipation of higher material costs 26.5% 23.5% 50.0% Anticipation of lower material costs 0.0% 5.9% 94.1% Other 11.7% 5.9% 82.4% For those reporting decreases: Significant Slight No Effect Sales of products less than anticipated 9.1% 9.1% 81.8% Sales of products greater than anticipated 22.7% 22.7% 54.6% Anticipation of higher energy costs 0.0% 13.6% 86.4% Anticipation of lower energy costs 4.5% 4.5% 91.0% Anticipation of higher material costs 27.3% 13.6% 59.1% Anticipation of lower material costs 0.0% 9.1% 90.9% Other 13.6% 0.0% 86.4% Summary of returns March 2005 Mar. vs. Feb. | Six Months from now vs Mar. | | Prev. | Prev. Diff. Inc. No ch. Dec. Diff. | Diff. Inc. No ch. Dec. Diff. Index Index | Index Index | General Busines 23.9 26.5 58.4 15.1 11.4 | 26.5 41.6 37.2 11.8 29.8 Conditions | | New Orders 11.7 31.3 49.8 18.1 13.2 | 29.8 46.1 32.3 10.7 35.3 | Shipments 23.8 34.4 45.5 19.7 14.7 | 30.9 51.7 28.2 12.3 39.4 | Unfilled Orders -2.8 15.4 65.8 17.4 -2.1 | 1.9 21.2 55.9 15.3 5.8 | Delivery Times 7.1 12.8 77.9 9.3 3.5 | 2.5 13.8 65.0 13.7 0.1 | Inventories -7.4 17.6 58.4 22.8 -5.3 | -16.9 23.4 48.4 22.4 1.0 | Prices Paid 43.5 36.0 57.6 6.4 29.7 | 63.1 50.2 33.3 8.0 42.2 | Prices Received 24.6 22.9 69.5 7.6 15.3 | 40.1 31.5 50.7 9.2 22.4 | Number of Emp. 12.3 20.9 68.3 10.8 10.1 | 11.8 33.9 46.7 12.4 21.5 | Avg. Emp. Wrkwk 11.3 15.8 65.5 13.2 2.6 | 3.5 16.9 63.3 11.6 5.3 | Capital Ex. -- -- -- -- -- | 23.9 34.4 38.1 4.0 30.4 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, 2005.