The Philadelphia Federal Reserve Bank’s Business Outlook Survey is a regional business condition survey put out monthly by the bank’s research department. This survey is used to create a manufacturing activity index and is based on questions given to manufacturers in the Pennsylvania, New Jersey, and Delaware region. The results are based on a diffusion index where the neutral value is zero. Index values greater than zero indicate growth, while negative values indicate contraction of manufacturing conditions within the Philadelphia Federal Reserve district.
In August, the index picked up considerably from the prior month, up to 28.0 from just 23.9 in July. This is the highest reading since March of 2011, and reflects the fact that 34.6 percent of firms reported increased business activity in August, while just 6.5 percent reported a decline. Even more importantly, business conditions are expected to improve markedly over the next six months, with 66.4 firms expecting more business and no firms expecting less activity.
The Philadelphia Fed’s survey contained a special question related to the Affordable Care Act (or Obamacare). Based on this question, more manufacturing workers are employing part-time workers or outsourcing, and nearly 29 percent have increased prices to offset increased costs from the law. Half of all manufacturing firms are modifying their coverage due to Obamacare, and of these nearly 90 percent are increasing employee contributions, raising deductibles and requiring higher out-of-pocket expenses.
The overall index is suggesting the prices are rising not only from Obamacare mandates, but due to higher prices paid for inputs. That said, the Philadelphia Fed’s index while not a direct indicator of future inflation trends, is among a number of recent statistics pointing toward higher prices for manufactured goods.
Headline inflation has been held in check by a number of factors, including better management practices, lower wages, long-term contracts for commodity inputs and in some cases a stronger trade-weighted dollar, particularly relative to the Euro. These may be starting to run their course, suggesting the potential for higher inflation in the near future. We will continue to watch the indicators for signs that a surge in prices is beginning.
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