The Philadelphia Federal Reserve's July Business Outlook Survey showed continuing declines in the region's manufacturing sector, though the drops were not as large as those registered over most of the first half of the year.

The survey, released Thursday, also reported that firms are still reporting declines in employment and work hours. Although input prices may be stabilizing, more than a quarter of the firms reported declines in prices for their own manufactured goods.

Future indicators suggested that firms expect improvement in conditions over the next six months, and for the third consecutive month, the number of firms expecting increases in employment over the next six months is larger than the number expecting declines.

The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from -2.2 in June to -7.5 this month. The index has been negative for 19 of the past 20 months, a span that corresponds to the current recession. Firms reporting decreases in activity (31%) slightly outnumbered those reporting increases (23%).

Other broad indicators also suggest weakness, though recent declines in new orders may be stabilizing, the Philly Fed said. The current new orders index edged three points higher, to -2.2, its highest reading in 10 months. However, the current shipments index declined 12 points. Indices for delivery times and unfilled orders, which have remained negative for 15 consecutive months, suggest continued weakness as well.

Labor market conditions remain weak, and firms continue to report employment losses and declines in work hours. The current employment index declined to -25.3, from an already weak reading of -21.8. 30% of firms reported declines in employment this month; only 5% reported increases. Although the workweek index improved 11 points, 24% of the firms reported shorter hours and 9 percent reported longer hours.

Firms reported less widespread declines in input prices, with the prices-paid index, although still negative at -3.5, up nearly 10 points. It has risen 28 points during the last three months. 15% of firms reported cost decreases, and 11% reported increases. However, declines dominated prices for the manufacturers' own final goods: More than 25% reported price declines, while only 4% reported increases. The prices received index declined five points, to -21.5.

Broad indicators of future activity fell somewhat from their six-year highs last month, but they continued to suggest that firms are expecting improved conditions later this year. The future general activity index remained positive for the seventh consecutive month, but decreased from 60.1 in June to 51.9 this month. Last month's reading was its highest since September 2003.

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