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Signs of a Slowdown? Evidence From Our October Business Surveys

Regional Matters
November 3, 2023

After a few months of upward movement in the headline indexes of our business surveys, results took a downward turn in October. This was especially true in the service sector, where both current and expected activity deteriorated noticeably. However, despite what may be evidence of a shift to a slower pace of demand, firms on balance appear to be holding steady on hiring plans, at least for the near term.

Recent Activity Was Improving

In our monthly business surveys, we saw a pickup in economic activity from mid-summer through September. The manufacturing composite index (a weighted average of the shipments, new orders, and employment indexes) moved into positive territory in September for the first time in a year and a half. Service sector activity showed similar positive movements. Indexes for revenues and demand each moved above zero during the summer, following a year mostly in negative territory. (See chart below.)

These more positive readings from our surveys have come alongside stronger growth in broad measures of economic activity. Last week, the Bureau of Economic Analysis reported that real GDP grew an estimated 4.9 percent at an annual rate in the third quarter, following growth rates between 2 and 3 percent for the previous four quarters.

But October Activity and Near-Term Expectations Largely Deteriorated

In October, however, most of our business activity indexes declined from the previous month, and we saw evidence of deteriorating expectations for the next six months, particularly for service sector firms. Current activity indexes for service sector firms' revenue, demand, and local business conditions all moved sharply lower for the month. Indexes for expected revenue and demand moved significantly lower, approaching zero, while the index for expected local business conditions fell well into negative territory. (See chart below.)

For perspective, in the history of these series dating back to 2011, there have been only three other months when the expected local business conditions index for the service sector dropped as much as it did in October, and two of those instances were at the onset of the COVID-19 pandemic. For expected demand, there have been only two other times with as big of a drop as October; for expected revenues, there have been six other instances of changes of the same or greater magnitude.

Among manufacturing firms, there is also some evidence of tempered activity and expectations. Indexes for new orders and firms' assessments of local business conditions fell during the month of October, as did indexes of near-term expectations. (See chart below.) However, these declines were not as dramatic as those in the service sector.

Firms Are Holding Steady on Hiring Plans for Now

Despite some slowdown in current and expected business activity, firms appear to be holding steady on their expectations for hiring. In both sectors, the employment expectation indexes remain fairly flat in positive territory with little indication of a downward turn. (See chart below and our recent post, "The State of Hiring in the Fifth District.")

The question now becomes: Will the weaker readings of business activity and conditions that we saw in October continue into November, and will the decline in expectations move into a decline in realizations? If so, will we see any change in firms' hiring plans? Our November survey results will be released Nov. 28, and at that time, we'll also be reporting results of additional special questions about the hiring outlook. We're asking firms about their expected employment changes over a longer time horizon — the next 12 months — and their reasons for changes. Stay tuned.

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