Business Outlook Survey

November 2005

Activity in the region's manufacturing sector continues to expand, according to firms surveyed for this month's Business Outlook Survey. Although indicators for general activity and new orders fell from their October readings, they remain near their average levels this year. Firms continued to report rising prices for inputs, and more than one-third reported receiving higher prices for their own manufactured goods. The region's manufacturing executives were somewhat more optimistic about future growth this month than in October.

Current Activity Indexes Suggest Continued Growth
The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 17.3 in October to 11.5 this month (see Chart). Twenty-three percent of the firms reported increases in activity (down six points from October); 12 percent reported decreases. The new orders index also had a six-point decline this month. Nearly 32 percent of the firms, however, reported increases in new orders. The shipments index rose four points. On balance, unfilled orders declined slightly, but delivery times continued to lengthen.

Continued expansion in manufacturing is evident in replies to questions about employment and hours worked. The percentage of firms reporting increased employment (20 percent) was higher than that of firms reporting lower employment (1 percent). The current employment index rose two points. On balance, the workweek was higher this month: more firms reported a longer workweek (18 percent) than a shorter one (10 percent).

Higher Prices Reported
Firms reported higher production costs again this month: 58 percent reported higher input prices; however, this was down from 68 percent in October. The prices paid index remains at a high level but fell 11 points.

Higher prices for final manufactured goods were also widespread again this month: 35 percent of the firms reported higher prices for their goods, up slightly from 33 percent last month. The prices received index, at 32.5, was virtually unchanged from October. Expectations regarding future price increases remain elevated: 59 percent of the firms expect input price increases over the next six months; 45 percent expect increases in prices of their own manufactured goods.

Six-Month Forecasts Improve
Expectations for future manufacturing growth showed improvement this month. The index for future activity increased from 22.0 in October to 29.2 this month, the highest reading in three months (see Chart). Other broad indicators of future growth showed similar increases: the future new orders index increased nine points and the future shipments index increased seven points. The future employment index increased slightly from October: more than twice as many firms anticipate increasing payrolls (25 percent) as expect to decrease them (12 percent). The future workweek index rose eight points.

In a special question this month, firms were asked about their expectations of percentage changes in costs by category for 2006 (see Special Question). The greatest increases in expected costs are for energy: 38 percent of the firms expect energy cost increases of more than 10 percent next year; 37 percent expect increases of between 5 and 10 percent. Seventy-nine percent of the firms expect raw material costs to increase next year; half expect a rise of more than 5 percent. Eighty-seven percent expect wages to increase less than 5 percent. Nearly 80 percent expect health benefit costs to rise more than 5 percent; 33 percent expect a rise of more than 10 percent.

Summary
Indicators continue to reflect growth in the manufacturing sector. Indexes for general activity and new orders remained positive but declined slightly this month. Indexes for shipments and number of employees increased from their readings in October. Responses from this month's survey suggest that input price pressures continued this month, and over one-third of the firms reported higher prices for their final manufactured goods. Firms expect continued growth in their businesses over the next six months, with one-fourth indicating that they will increase employment.

Special Question (November 2005)

What percentage change in costs do you expect for the following categories in 2006?

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