Reserve bank study finds war worries - Many Del. firms cite 'uncertainties'

www.delawareonline.com By MAUREEN MILFORD Staff reporter 02/21/2003

In a clear indication that world events are dampening Delaware's economy, 40 percent of manufacturers in the region said geopolitical uncertainties are impeding their 2003 hiring and spending plans, the Federal Reserve Bank of Philadelphia reported Thursday.

As part of its monthly survey of the region's manufacturing sector, the bank asked 100 companies in Delaware, southern New Jersey and eastern Pennsylvania about the impact of world politics on their businesses. The threat of a war with Iraq, domestic turmoil in Venezuela, terrorism and rising tensions between the United States and North Korea are among the unsettled questions affecting the economy, the bank said.

Most companies - 58 percent - said lack of business demand has been a drag on hiring and capital spending, but two out of five businesses said world events are having an adverse affect.

Of the group concerned about geopolitical uncertainties, 79 percent said the negative impact on hiring is slight, while 12 percent characterized it as significant.

When it comes to capital spending, or expenditures on land, buildings, equipment, furniture and fixtures, 36 percent of the regional companies reported a significant harmful impact from geopolitical uncertainties, while another 58 percent reported the impact as slight.

In recent weeks, economists have said Delaware's economy will not pick up steam until the crisis with Iraq has been resolved. Unlike other economic recoveries that followed recessions since World War II, employment and business investment have not rebounded. That has led some economists to call it a jobless recovery.

Once geopolitical questions are eliminated, 59 percent of the businesses said they would increase hiring within six months and 10 percent said hiring would grow immediately. In addition, 53 percent said capital spending would increase within six months.

As for its monthly survey of manufacturing health, the Philadelphia Fed reported that its general business activity index fell to 2.3 in February, down from 11.2 in January and well below economists' expectations for the month.

"Although manufacturers still expect economic conditions to improve over the next six months, they have generally grown much less optimistic," the bank said.

The Philadelphia Fed, which has been doing a monthly business outlook survey since 1968, said it surveys the manufacturing sector because it is one of the first sectors to feel the effects of an economic downturn.

The Fed's monthly indexes, covering current activity, employment, shipments, inventories and prices, show the difference between the percentage of manufacturers that saw increases and percentage of companies that saw declines.

Simply put, anything above zero signals growth, while a negative number indicates a contraction, according to Katherine Woodbury, spokeswoman for the bank.

Manufacturing employment in February remained negative with the index at minus 0.9. However, that's an improvement from minus 6.1 in January.

Looking ahead six months, the future employment index rose to 16 from 5.4.

The index for future capital spending also rose, from 9.5 in January to 12.9 in February.

Reach Maureen Milford at 324-2881 or at mmilford@delawareonline.com.