Kansas City Manufacturing Activity Contracts

By October 25, 2012Economy

The Kansas City Federal Reserve Bank said that manufacturing activity in its district was slower in October, with its monthly composite index down from 2 in September to -4 in October. This was its first negative reading since December, as unlike many other regional sentiment surveys, the Kansas City region had continued to see modest growth up until now.

According to Chad Wilkerson, the bank’s vice president and economist, “We saw factories pull back this month for the first time in a while, which many firms attributed to the impact of uncertain political and fiscal situation on customers’ willingness to order.”

The various components of the index were all lower. The index for new orders has dropped from 11 in August to -2 in September to -11 in October. This suggests a high degree of deterioration in sales volumes, with 5 of the past 7 months seeing negative values for new orders. Other contracting items included production, shipments, exports, and employment. The prices paid for raw materials remained elevated, reflecting the pickup in costs seen in the past few months.

Manufacturers in the Kansas City region are also less optimistic about the future than they were less month. The composite index for business activity for six months from now decreased from 16 to 3. Measures for production, shipments, new orders, and hiring all remained positive, but with each of them easing from the levels observed in the prior month. The average workweek and export sales are expected to decline on average in the coming months. One bright spot is capital spending, with its forward-looking index rising from 11 to 16, suggesting some modest gains in the number of firms planning investments.

This is another report showing weaknesses in the manufacturing sector, with anxieties about the global and U.S. economies first-and-foremost in business leaders’ minds.

Meanwhile, the Chicago Federal Reserve’s National Activity Index (NAI) improved from -1.17 in August to 0 in September. As a reminder, a zero value suggests that the U.S. economy is growing along its historical growth trend. This release provides us with only modestly goods news. On the one hand, it suggests that August was a very bad month, as the original estimate for the NAI was -0.87.

This month’s progress was due in large part to gains in production, employment, and sales from significantly weaker data the month before. Indeed, industrial production rose 0.4 percent in September after falling 1.4 percent in August. Manufacturing accounted for the largest source of improvement in the NAI. On the employment front, the unemployment rate dropped from 8.1 percent to 7.8 percent, even with disappointing nonfarm payroll growth, especially for manufacturers. Gains in housing and consumer data were also helpful in improving the NAI last month.

With all of that said, the three-month moving average remains in negative territory. Over the course of the last three months, the moving average has been -0.21, -0.53, and -0.37. Clearly, this month’s better data has helped the three-month average, and yet, it is also clear that the U.S. economy continues to operate below its historical trend. The headwinds that are pushing the NAI lower are unlikely to be resolved in the next couple months, suggesting that it will remain choppy moving forward, at least in the short-term.

Chad Moutray is chief economist, National Association of Manufacturers.

Chad Moutray

Chad Moutray

Chad Moutray is chief economist for the National Association of Manufacturers (NAM), where he serves as the NAM’s economic forecaster and spokesperson on economic issues. He frequently comments on current economic conditions for manufacturers through professional presentations and media interviews. He has appeared on Bloomberg, CNBC, C-SPAN, Fox Business and Fox News, among other news outlets.
Chad Moutray

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