Two of the Midwestern Federal Reserve regions reported slower manufacturing activity in their most recent surveys. First, the Kansas City Federal Reserve Bank said that its monthly composite index dropped from 8 in August to 2 in September. This suggests that manufacturers in its region were growing more slowly this month.
Indeed, several of the components were consistent with other Fed regions that have noted contracting activity. The Kansas City Fed’s previous survey had bucked the trend somewhat with stronger levels of production and new orders, but this month, global and national weaknesses have appeared to have taken their toll.
The index for new orders, for instance, dropped from 11 to -2, with similar negative values observed for production, shipments, the average workweek, and exports. Job creation has slowed to a near standstill, with the employment index down from 2 to 1.
Meanwhile, pricing pressures have picked up, with the prices paid for raw materials beginning to creep higher. The index for raw material prices has risen from 7 in June to 26 in August to 30 in September. Looking ahead six months, most manufacturers expect for these costs to increase, with the forward-looking index of raw material prices at 60 in September, up from 49 in August.
Despite the slower growth figures, manufacturers in the Kansas City region are cautiously optimistic about growth moving forward, albeit with less enthusiasm that observed last month. The composite index for business activity for six months from now decreased from 18 to 11. This indicates modest growth is expected in production and new orders. Employment and capital spending intentions, though, indicate that manufacturers plan to hire more workers and invest in their businesses, even with all of the potential headwinds facing them.
At the same time, weaknesses were reported elsewhere in the Midwest, as well. The Chicago Federal Reserve Bank said that its Midwest Manufacturing Index (MMI) fell 1.2 percent from 95.3 in July to 94.1 in August. Slower auto production led the index lower, with motor vehicles activity off 4 percent for the month in the region. Even with August’s decline, the auto sector remains a net positive on a year-over-year basis, with production up 21.7 percent since August 2011. Indeed, the motor vehicle segment has helped to lift the MMI over 10 percent over the past year.
Outside of autos, manufacturing activity was mixed in the Chicago Fed region in August. Steel output declined 0.5 percent, but both machinery and resource production rose 0.1 percent each. The Midwest has seen stronger growth than the national average, which has seen industrial production rise 4 percent over the past 12 months. In addition to motor vehicles, strong annual output gains were seen the machinery (up 9.4 percent) and steel (up 8.6 percent) industries.
In summary, the Midwest – which has benefited from strong domestic and global demand for its manufactured goods, especially in the durable goods sectors – has slowed its growth. We are seeing similar trends in other indicators. With global growth slowing and pervasive doubts about the political and fiscal environment moving into 2013, the economic expansion has slowed considerably. It will be important for us to reverse that course to get manufacturing expanding and hiring once again.
Chad Moutray is chief economist, National Association of Manufacturers.