Regional manufacturing activity shrank in April, but employment increased, according to the Philadelphia Federal Reserve's Business Outlook Survey, which was released Thursday.

The survey's broadest measure, the diffusion index, edged downwards from 12.5 in March to 8.5 in April, indicating that fewer manufacturing firms were reporting an increase in activity. The survey includes eastern Pennsylvania, southern New Jersey and Delaware.

April marks the first drop in the diffusion index in six months, according to MarketWatch.

Analysts surveyed by Dow Jones Newswires had expected the diffusion index to only drop to 10.7. Diffusion index readings above zero represent expansion, below zero, contraction.

The April Business Outlook Survey suggests that the region's manufacturing sector grew modestly this month. All of the broad indicators remained positive, but a greater share of firms reported adding to their payrolls this month ... the overall outlook among the reporting firms remains optimistic, with firms' future employment plans showing notable improvement this month, the report said.

New orders and shipments remained positive in April, but dropped about 1 percent compared with March, keeping them at low levels. However, the index for unfilled orders rose 14 points in April, reaching positive territory and suggesting a backlog of unfilled orders. Inventories rose by 7 points in April.

The big gain in April came from the employment index as it saw a notable pickup in levels of employment. The index rose 11 points, the eighth consecutive month of positive gains and its highest level in 11 months, according to the survey. While 27 percent of manufacturing firms reported increased employment, only 9 percent reported declines. The average workweek remained unchanged in April.

Employment levels are expected to continue rising. The future employment index rose 6 points in April to its highest level in a year, and 35 percent of manufacturing businesses expect to increase employment in the next six months, compared to just seven percent that expect to decrease employment.

Prices paid and received both ticked upwards, indicating increased price pressures since March. Twenty-seven percent of manufacturing firms reported higher input prices compared with only 25 percent in March, and the prices paid index rose 4 points. However, 17 percent of firms reported that their selling prices rose 17 percent while only 8 percent reported decreases.

Future indicators show that manufacturing activity is expected to expand in May. The future general activity index rose from a relatively high reading of 32.9 in March to 33.8 this month, the survey report said. Indexes for new orders and shipments were virtually unchanged compared to March.