Survey respondents optimistic about regional economy

In the second quarter, respondents to our survey reported economic conditions were very similar to what they reported in the first quarter. The trend on most indicators of business activity is slightly upward, but levels of optimism have not returned to the high levels seen at the end of 2006.

The two most prominent findings from the survey are that the diffusion index for capital spending is up, both for the current quarter and when respondents look six months into the future. For businesses to increase their capital expenditures, there must be some optimism about the future. On the downside, the number of respondents reporting higher raw-materials prices this quarter exceeds the number reporting lower prices, and most respondents expect those prices to remain high, at least in the short term.

Indicators still mixed

Our respondents view the national- and state-level economies to be worse off than they were three months ago, but they see improvements at the regional level and within their companies. The national diffusion index for the second quarter was -9.5. For the state, it was -11.4. The index measures the percentage of respondents indicating an increase minus the percentage of respondents indicating a decrease. At the same time, the regional diffusion index was 6.4 in the second quarter, and the company-specific index was a robust 21.0.

At the company level, the second-quarter readings suggest mixed results. The diffusion indexes for sales — or shipments in the case of manufacturers — and for customer traffic or inquiries were down in the second quarter, by 20 percent and 22 percent, respectively. The inventory diffusion index slipped into the negative range, meaning more companies reported declines in inventories than reported increases.

Material costs, wages squeeze profits

The indexes for prices received and wage costs both jumped in the second quarter. Combine those readings with increases in raw-materials prices, and you can see how company profits likely are being squeezed.

Capital spending a bright spot

The readings on acquisition of new space and the renovation of existing space were both up in the second quarter, while the index for spending on equipment was steady. Capital spending is a forward-looking activity that suggests some optimism for the future.

Future murky

Looking out six months, the national and state-level diffusion indexes remained negative in the second quarter, while the regional index was positive and actually improved over the first quarter. As respondents look to the future on our company-specific activity indicators, they seem to be optimistic — but not quite as optimistic as they were in the first quarter. All indexes are positive — sales, customer traffic or inquiries and so on. Substantially more respondents see company-level performance improving six months from now when compared to second-quarter performance.

Summary

The sluggishness in business activity we began to see with the first-quarter survey has continued into the second quarter with expectations of more of the same in the near future.

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Ken Slaysman is executive director of York College's Institute for Regional Affairs. E-mail him at kslaysma@ycp.edu.