Philadelphia Fed Survey Shows Improving Service-Sector Activity but Persistent Cost Pressures

Business conditions improved at service-sector firms surveyed by the Federal Reserve Bank of Philadelphia in October, although rising operating costs continued to complicate the picture. Respondents reported stronger activity, orders and revenue at their own businesses, even as the share experiencing higher input prices increased.

At individual firms, the current activity index rose to 12.9 from 0.3 in September, its strongest reading since July. New orders returned to positive territory for the first time since that month, and the sales and revenue index also advanced. The prices-paid index, meanwhile, reached 42.1, its fourth consecutive monthly increase.

Released October 20, the Philadelphia Fed’s Nonmanufacturing Business Outlook Survey covers businesses in Delaware, southern New Jersey, and eastern and central Pennsylvania. Responses were collected October 5 through October 15. It captures executives’ assessments of the direction of change rather than measuring the dollar value of output or an actual rate of price inflation.

Improvement at individual businesses did not extend to perceptions of the wider regional economy, which deteriorated further. That divide helps explain why an uptick in current business activity does not necessarily translate into confidence about the local economy as a whole.

Input-cost pressure broadens as selling-price index falls

In October, the prices-paid index climbed to 42.1 from 37.8 in September, reaching its highest level since April. Nearly half of respondents, 49.6%, reported an increase in prices for inputs; 7.5% reported decreases. A further 33.0% said their input prices were unchanged. The measure shows that increases remained much more widespread than decreases, rather than indicating that prices rose by 42.1%.

Changes in the prices firms charged their customers were less widespread. The prices-received index fell from 20.0 to 8.6, also its lowest reading since April. Only 17.6% reported higher prices for their own goods and services, while 9.0% reported cuts. About two-thirds, 66.8%, said their selling prices had not changed.

Rising supplier charges do not automatically translate into increases in what businesses charge their customers. The figures are consistent with some businesses experiencing pressure to absorb costs, but the survey does not quantify price increases or profit margins. A reading of 42.1 for inputs and 8.6 for selling prices cannot, by itself, establish how much profitability changed.

Labor-related costs were another source of pressure. The wage and benefit costs index rose to 48.5 from 40.7 in September. More than half the firms answering that question, 51.3%, reported increases, compared with 2.7% reporting decreases. Like the other diffusion measures, the index reflects how broadly costs are rising, not the average percentage increase in pay or benefits.

September’s survey showed broader increases in both prices paid and prices received than in August. October brought a further rise in the input-cost diffusion index but a retreat in the selling-price index. Together, those movements point to a mismatch in the breadth of price increases, not to a measured acceleration in the overall service-sector inflation rate.

New orders recover, but hiring momentum moderates

At the company level, 38.2% of respondents said general activity increased in October, compared with 25.3% reporting declines and 36.6% reporting no change. The positive balance lifted the firm-level activity index by 12.6 points from September. A month earlier, the measure had been barely above zero, indicating little difference between the shares seeing improvement and deterioration.

Demand indicators offered some support for the improvement. The new orders index rose to 2.8 from minus 2.2, suggesting a modest positive balance rather than an across-the-board surge. The sales and revenue index increased to 14.6 from 6.8; 40.9% of businesses reported higher sales or revenue, compared with 26.3% reporting declines. The unfilled-orders index remained negative at minus 7.0, however, suggesting backlogs were not broadly increasing.

Employment measures were positive but less strong than in September. The full-time employment index declined to 12.0 from 19.0. About 29% of respondents reported adding full-time staff, 17% reported reductions, and 53% reported no change. The part-time, temporary and contract employment index slipped much more sharply, to 1.3 from 10.7.

Those figures describe a labor market in which hiring increases still outnumbered cuts among respondents, but by a smaller margin. The average workweek index moved in the opposite direction, rising to 11.3 from 8.5. Businesses therefore reported somewhat more widespread increases in hours even as the balance of firms expanding their headcounts narrowed.

A separate question produced a markedly less favorable regional assessment. The current regional general activity index fell to minus 23.6 from minus 22.0, its lowest level since June. Only 10.9% of respondents judged regional activity to be increasing, against 34.5% reporting a decline. Executives may report improving sales at their own companies and still perceive weakness elsewhere; the survey records those distinct judgments rather than resolving the difference.

Investment plans improve even as expectations cool

Looking six months ahead, respondents remained more likely to anticipate growth than contraction at their own firms, but the balance became less favorable. The future firm-level activity index declined to 11.3 from 20.3 in September. About 44% anticipated an increase in activity, while 33% expected a decrease and 23% foresaw little change.

Sentiment about the wider region weakened more sharply. Its future activity index fell from 2.0 to minus 9.0, returning to negative territory. Taken with the current regional reading, that indicates a more cautious assessment of conditions beyond respondents’ own businesses. It is not a forecast that measured regional output will fall by 9%, since the indexes reflect the balance of survey responses.

For 2027, companies still reported a positive balance of investment intentions. Asked whether total capital expenditures would be higher, unchanged or lower than in 2026, 44.4% expected to spend more and 25.9% expected to spend less. Another 29.6% anticipated no change. Those plans were somewhat more tilted toward increases than responses to the comparable question a year earlier, when roughly 39% expected higher total spending.

Spending plans also differed across categories. Software led the categories with 37.9% planning increases and 13.8% expecting cuts. The balances for noncomputer equipment and computer-related hardware were positive as well. Structures moved in the other direction: 14.3% anticipated higher spending, whereas 28.6% expected lower spending. More than half the respondents planned to hold spending steady on structures, underscoring the unevenness of the investment outlook.

These are intentions, not commitments, and they do not cancel out October’s weaker regional sentiment. The monthly survey provides an early reading of how participating firms experience changes in business conditions, but it is voluntary and does not establish national service-sector growth. The Philadelphia Fed’s next nonmanufacturing survey is scheduled for November 24, offering another measure of whether the rebound in orders persists and whether cost pressures ease.