The Federal Reserve Bank of Philadelphia released its April Manufacturing Business Outlook Survey this week, and the headline index fell into contraction for the first time in four months. The current activity index dropped to negative 3.5, down from positive 8.7 in March. Readings below zero indicate that more manufacturers reported declining business conditions than improving conditions during the month.
The survey covers manufacturing firms in the Third Federal Reserve District, which includes eastern Pennsylvania, southern New Jersey, and Delaware. Results are closely watched because the regional Fed surveys typically telegraph national manufacturing trends several weeks before the Institute for Supply Management releases its monthly national report. The Philadelphia Fed survey also tracks a set of forward looking indicators that give a sense of how factory operators are planning for the months ahead.
New orders fell sharply. The index for new orders dropped to negative 4.2 in April from positive 12.1 in March. Shipments also declined, with the shipments index moving to negative 1.8 from positive 9.9. The share of firms reporting increases in new orders fell to 22 percent, while 26 percent reported decreases. Manufacturers in the survey pointed to softer demand from domestic customers and continued uncertainty around trade policy as reasons for the pullback.
Employment indicators were mixed. The employment index remained positive at 4.1, down slightly from 5.3 in March, indicating that firms overall were still adding workers. Average workweek readings were negative, suggesting that hours worked per employee declined during the month. Roughly 15 percent of firms reported increasing employment, while 11 percent reported decreases.
Price indicators stayed elevated. The prices paid index rose to 38.6 in April from 35.4 in March, marking the ninth consecutive monthly increase. The prices received index, which tracks what firms charge their own customers, moved up to 26.8 from 22.1. Manufacturers continued to report rising input costs from tariffs on imported materials and components, with firms saying they are passing on larger portions of those costs to customers.
The future activity indicators were more cautious than in recent months. The six month outlook index fell to 18.2 from 28.5 in March. Firms projecting increases in future activity dropped to 32 percent of respondents, while those expecting decreases rose to 14 percent. Future new orders and shipments indexes also declined but remained positive.
Special questions in this month's survey asked firms about capital spending plans. About 34 percent of respondents said they expect to increase capital spending over the next six months, down from 41 percent in the January survey. Roughly 18 percent said they plan to decrease spending. The most frequently cited reason for slower spending was uncertainty about trade policy and tariff rules, followed by concerns about near term demand.
Economists had expected a softer April reading but the negative headline caught some forecasters by surprise. Consensus estimates ahead of the release had called for a positive reading near 6. The Philadelphia Fed's own diffusion index smoothed three month average remained in positive territory, suggesting that the April drop represents softening rather than a sharp downturn.
The release feeds into a broader picture of uneven manufacturing activity across the country. The New York Fed's Empire State survey earlier this month also weakened, falling to negative 8.1 from positive 5.6. The Richmond Fed survey showed a smaller decline. The Kansas City Fed survey will be released next week, and the Institute for Supply Management's national manufacturing report is due on May 1.
Markets responded modestly to the Philadelphia Fed data. Ten year Treasury yields fell three basis points to 4.22 percent on the release, while manufacturing heavy stock sectors traded lower on the day. Futures markets showed a slight increase in the probability of a Federal Reserve rate cut at the June Federal Open Market Committee meeting, though expectations remain that rate decisions will depend primarily on inflation data over the next several weeks.
Federal Reserve Chair Jerome Powell is scheduled to speak at an economic policy forum next week. Market participants will be listening for any commentary on the softening in regional manufacturing data and whether policymakers are weighing that input against persistent price pressures. The next Philadelphia Fed survey is scheduled for release on May 21, covering activity for the month of May.