Philly Fed Index Shows Weak Return to Manufacturing Growth

Manufacturing activity in the mid-Atlantic region showed only modest improvement in October, according to the Federal Reserve Bank of Philadelphia, further evidence that the U.S. economic recovery down-shifted in recent months.

The Federal Reserve Bank of Philadelphia's Business Outlook Survey, commonly known as the Philly Fed Survey, rose to 1.0 in October from minus 0.7 in September, the bank announced Thursday.

Economists surveyed by Bloomberg had expected the index to rise to 1.0 in October. Readings above zero indicate an expansion; below zero, a contraction. The index had been negative since August.

A Little More Hiring, but Hours Keep Declining

However, despite the rise to positive territory overall, key Philly Fed index components continued to reveal regional economic softness. The closely-followed new orders component -- a measure of future demand -- rose to minus 5.0 in October from minus 8.1 in September, but remained at a level that indicates declining orders.

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The employees component rose to to 2.4 from 1.8 -- a tally that denotes that companies slightly increased employment levels in October. However, the average workweek component rose to minus 6.0 in October from minus 21.6 in September -- a figure that indicates that companies are still reducing employees' hours, though not as widely as they did last month.

The prices paid component surged to 31.5 from 9.8 and the prices received component rose to minus 9.0 from minus 13.9. The readings suggest both higher input costs for companies and lower prices received for their goods -- neither of which is good for business.

The Philly Fed also surveys manufacturers concerning their long-term outlook, and here, at least, there was good news: Most companies continued to expect growth in their businesses over the next six months, and showed considerably more optimism about the future than they did in September.

Economists monitor the Philly Fed survey because it typically provides an early indication of what will be revealed by the larger economic surveys that come out later, such as the Institute for Supply Management's manufacturing survey and services survey.

Majority of Companies Using Temp Workers

October's special section asked manufacturers about changes in their workforce and the changing use of flexible workers over the past year.

During the past year, 40% of firms said they increased their total workforce, while 35% said they decreased staff. Also, 64% of firms said they used temporary or agency workers, while 36% said they did not.

Overall, October's Philly Fed report was disappointing. The top-line statistic registered a minor improvement and technically moved back into the growth column, but the new orders and employment components confirmed weak demand conditions for manufactured goods. As a regional report, its results mirrored other key economic measures: The U.S. economy is growing at a snail's pace -- not nearly fast enough to lower the nation's high 9.6% unemployment rate -- and that's a major reason the U.S. Federal Reserve is considering additional quantitative easing to help stimulate economic activity.