Data from two of the Federal Reserve Banks reflect manufacturing activity moving in opposite directions in their respective regions. To be fair, one of them is for October and the other is for November. Nonetheless, they paint a somewhat mixed picture of production and new orders.
First, the Richmond Federal Reserve Bank noted improvements in manufacturing sentiment in November. Its composite index of general business conditions rose from -7 in October to 9 in November. This measure has been highly volatile, with negative (or contracting) values in four of the past six months. Its lowest point was in July, when the composite index was -17.3. This suggests significant progress since that time.
The one factor that has pushed the index higher or lower during this time frame has been sales. The index of new orders rose from -6 in October to 11 in November, indicating a nice turnaround in sales for the month. Similar reversals were also seen in shipments and employment. Yet, capacity utilization continues to shrink, with an index in October of -3, demonstrating room for improvement in the coming months. The employment index, while now positive, also implies that net hiring remains sluggish.
It is also clear that manufacturers in the Richmond region have also become more cautiously optimistic about future activity. Improvements were observed in forward-looking measures for the next six months for shipments, new orders, and capital spending. Similar to the current readings, though, employment growth is expected to be skittish, with it anticipated not to change. Also, the pace of capacity utilization growth is anticipated to slow.
Pricing pressures reflect falling energy and other raw material costs. The prices paid for inputs increased 1.99 percent at the annual rate in November, down from 3.21 percent in October. Future costs are also expected to be growing more slowly.
Meanwhile, the Chicago Federal Reserve Bank’s Midwest Manufacturing Index (MMI) declined 1.2 percent in October. The MMI fell from 93.2 in September to 92.1 in October. Its recent peak was 95.5 in July, suggesting that manufacturing activity has fallen 3.6 percent since then. In October, the largest decline in production occurred in the machinery sector, down 2.5 percent. Steel and resource sector* activity decreased 0.5 percent and 1.9 percent, respectively, for the month. Auto production, which had declined in prior months, was unchanged in October.
In general, the Midwest has been one of the stronger regions in the country for manufacturing production, propped up by strong demand for durable goods. Strength in the auto, steel, and machinery sectors has been the primary reason. Recent declines have slowed this pace. Even with this easing, the MMI has increased 5.9 percent year-over-year, with auto production up 13.5 percent.
* The Chicago Fed defines the “resource sector” as “food, wood, paper, chemical, and nonmetallic mineral” activity.
Chad Moutray is chief economist, National Association of Manufacturers.
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