Business Outlook Survey

June 2005

Activity in the region's manufacturing sector weakened in June, according to firms surveyed for this month's Business Outlook Survey. This represents a decline from the moderate performance in May. Indexes for general activity, new orders, and shipments fell from their readings in May, and most indicators have weakened over the past two months. Firms continued to report a rise in prices for inputs and for their finished goods, although the survey's price indexes fell again this month. Overall employment was reported slightly higher, and average work hours also improved. Despite the weakness in current conditions, expectations for growth over the next six months improved somewhat this month.

Conditions Weaken This Month
The diffusion index of current activity, the broadest measure of manufacturing conditions, fell from 7.3 in May to -2.2 this month. This is the index's first negative reading in 25 months (see Chart). The portion of firms reporting decreases in activity (21 percent) was slightly greater than the portion reporting increases (19 percent). The current new orders index fell 13 points this month, and the shipments index fell eight points. Both indexes remained positive but suggest little or no growth in June. Indicators for unfilled orders and delivery times were negative and provide corroborating evidence of weakness: the unfilled orders index fell 19 points, and the delivery times index fell 14 points.

Despite the weakening in broad indicators, the survey's employment index was slightly higher this month. The current employment index rose from 5.4 in May (the lowest reading since November 2004) to 7.1 this month. More firms reported higher employment than lower (18 percent versus 11 percent); 71 percent reported no change.

Price Pressures Moderate Again
Although firms continue to report higher production costs, the index for input prices fell notably this month. The diffusion index for prices paid declined from 30.9 in May to 23.5. The index has generally trended down since its high reading of 66.1 in January and is now at its lowest point in 21 months.

Firms continue to report higher prices for their own manufactured goods, though price increases were less widespread this month (17 percent reported higher prices; 9 percent reported lower prices). The diffusion index for prices received fell eight points and is now at its lowest reading in 18 months.

Outlook Remains Favorable
Despite the weakness in current activity this month, expectations for future growth improved. The index for future activity increased from 22.3 in May to 30.6, its highest reading in six months (see Chart). The portion of firms anticipating improvement in business conditions over the next six months (47 percent) continues to exceed the portion expecting deterioration (16 percent) by a significant margin. Other future indicators improved. The future new orders index increased 19 points, and the future shipments index rose 16 points. The future employment index also increased notably, from 7.0 in May to 21.4 this month. The future workweek index paralleled the increase in the future employment index. The future capital spending index edged up four points.

In special questions this month, firms were asked about their expectations for spending on new plant and equipment over the next six to 12 months, relative to actual spending during the past six to 12 months (see Special Questions). Nearly 40 percent of the firms indicated that they plan to increase spending; 13 percent said they planned a decrease. There was a slight decline in the percentage of firms expecting increases compared to January when the same question was posed to the survey participants. The most frequently cited reasons for planned increases in spending were expected sales growth, the need to replace capital goods, and a high current capacity utilization rate.

Firms were also asked about their anticipated employment increases in the same six- to 12-month period. Forty-three percent of the firms expect increases over that period, and 11 percent expect decreases. Nearly 22 percent of firms expect an increase of up to 3 percent, and about 14 percent of the firms expect increases of between 4 and 6 percent. About 8 percent said they expect employment increases of more than 7 percent.

Summary
Overall manufacturing conditions in the region weakened this month, as indicators of current performance fell from their May readings. Indexes for general activity, new orders, and shipments dropped to their lowest readings in two years and suggest little or no growth for the month. Firms continued to report higher prices for inputs and their own manufactured goods, but the survey's price indicators fell again this month. Although current conditions were reported weaker this month, manufacturers were more optimistic about growth in manufacturing over the next six months.

Text version

Release, tables, and chart (pdf format)

Return to Main Business Outlook Survey Page