October 2007 Activity in the region's manufacturing sector continued to expand in October but at a somewhat slower pace than in September. Indicators for general activity and new orders remained positive but fell from their readings last month. Overall employment was reported higher. Significantly more firms reported a rise in prices for inputs, and price increases for finished goods were more widespread this month. Also this month, the region's manufacturing executives were, on balance, more optimistic about future activity than they were in September. Some Indicators Suggest Slowing This Month The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 10.9 in September to 6.8 this month (see Chart). Fifty-two percent of the firms reported no change in activity from September, but the percentage of firms reporting increases (27 percent) remained greater than the percentage reporting decreases (21 percent). Other broad indicators suggested some slower growth this month. Demand for manufactured goods, as represented by the survey's new orders index, slipped this month; the index decreased 12 points but remained positive. The current shipments index fell 21 points, however, and moved below zero for the first time since September 2006. A slowing in manufacturing is not evident in replies about employment and hours worked this month. The percentage of firms reporting an increase in employment (26 percent) was higher than the percentage reporting a decrease (13 percent), and the current employment index increased five points from its September reading. The average workweek index remained positive but edged seven points lower. Price Pressures Are Greater This Month A larger percentage of firms reported higher prices for inputs this month: 46 percent of the firms reported higher input prices this month compared to 30 percent in September. The prices paid index jumped 17 points and has now increased for two consecutive months. The prices received index increased nine points. Although 66 percent of the firms reported steady prices for their own manufactured goods, 23 percent reported higher prices, and 11 percent reported lower prices. Six-Month Forecasts Remain Optimistic Expectations for manufacturing growth over the next six months showed some improvement this month. The future general activity index, at 41.5, is six points higher than in September and is now at its highest level since November 2004 (see Chart). The index for future new orders held steady this month, but the future shipments index decreased seven points. The future employment index edged two points higher. Forty-two percent of the firms expect to increase employment over the next six months; 15 percent expect decreases. In special questions this month, firms were asked if recent changes in financial conditions had influenced planned spending on new plant and equipment over the next six to 12 months relative to the past six to 12 months (see Special Questions). Although two-thirds of the firms indicated no revisions in plans, 12 percent indicated substantial downward revision in planned spending, 13 percent indicated a small downward revision, and only 1 percent expected substantial upward revision. With regard to their actual plans, nearly 32 percent of the firms said they plan to increase capital spending over the next six to 12 months - somewhat lower than the percentage at the beginning of this year (40 percent), when the same question was posed. Twenty-six percent said they plan to decrease spending, up slightly from 22 percent at the beginning of the year. Summary Indicators of current activity suggest continued growth of the region's manufacturing sector, although at a slightly slower rate than in September. Most current indicators suggest slower growth. Indexes for general activity, new orders, and employment all remained positive, although the shipments index fell significantly from September. A significantly larger percentage of firms reported higher costs this month, but half as many firms reported higher prices for manufactured goods. Despite weakening in some current indicators, manufacturing executives remained optimistic about growth over the next six months. NOTICE: Effective January 2008, the Business Outlook Survey will be released at 10 a.m. ET, instead of at noon, on the third Thursday of the month. Special Questions (October 2007) 1. Have recent changes in financial conditions prompted your firm to revise its planned spending on new plant and equipment over the next six to 12 months? Substantial downward revision 11.6% Small downward revision 12.8% No change 67.4% Small upward revision 7.0% Substantial upward revision 1.2% 2. After taking account of any recent revisions to spending plans, do you expect your firm’s spending on new plant and equipment over the next six months to increase, decrease, or be about unchanged relative to your actual spending over the past six to 12 months? Oct Jan Jan 2007 2007 2006 Decrease 25.9% 21.7% 15.2% No change 42.4% 38.1% 45.6% Increase 31.7% 40.2% 39.2% October 2007 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 10.9 27.3 52.2 20.5 6.8 35.7 52.1 30.1 10.6 41.5 Conditions New Orders 15.1 27.1 48.0 24.5 2.7 43.5 55.6 32.3 12.1 43.5 Shipments 16.9 23.0 48.8 27.1 -4.1 45.4 54.1 28.7 15.5 38.7 Unfilled Orders -1.0 16.7 58.5 24.8 -8.2 14.3 17.9 64.3 14.3 3.6 Delivery Times -6.1 14.1 71.0 13.1 0.9 -5.2 11.6 67.2 16.4 -4.8 Inventories 4.0 10.7 61.6 25.7 -15.0 -7.3 18.9 48.5 27.8 -8.9 Prices Paid 23.1 45.7 48.0 5.4 40.3 48.8 53.9 37.7 2.4 51.5 Prices Received 3.3 22.9 66.4 10.5 12.4 31.2 45.6 42.7 7.5 38.1 Number of Emp. 7.5 26.0 59.5 13.4 12.6 25.1 42.3 37.6 15.4 26.9 Avg. Emp. Wrkwk 11.9 21.2 58.9 16.1 5.1 10.6 18.3 65.4 12.0 6.3 Capital Ex. -- -- -- -- -- 21.3 33.9 41.8 13.3 20.5 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 October 15, 2007.