The Kansas City Federal Reserve Bank said that manufacturing activity continues to contract in its District. Using data that was revised with new seasonal adjustments, the composite index has been negative for four consecutive months, down slightly from -1 in December to -2 in January. With the Kansas City data, we have now had four straight surveys from regional Fed banks showing contracting levels of activity (including New York, Philadelphia, and Richmond). At a minimum, this shows the degree of anxiety that it out there on the part of manufacturers.
Indeed, many of the sample comments provided in the press release tend to focus on uncertainties in the marketplace and frustrations with the U.S. fiscal situation. One individual wrote, “Economic uncertainty has made our customers reluctant to place orders more than a month in advance and it appears most are cutting their inventory on hand which further depresses orders.” Another respondent added (possibly as a reaction to the fiscal cliff deal), “Fiscal issues are not truly resolved and we remain cautious relative to all hiring, investment, and other business expansion.”
These comments flow through to the underlying survey data, as well. Despite some improvement in the index for new orders from -5 to -2, sales declined in 8 of the last 10 months. This highlights the weaknesses in the current environment. Other indicators in negative territory include production, shipments, employment, exports, and inventories. The prices paid for raw materials also appear to remain elevated even with some easing in this month’s figures.
The good news is that forward-looking expectations for the next six months continue to be positive, albeit less so than was seen in September or before. Manufacturers remain cautiously optimistic about higher levels of activity over the coming months, including an increased expectation for new orders. Capital spending and hiring plans, though, suggest only light growth ahead. Again, that is consistent with other surveys – such as the NAM/IndustryWeek one – which show manufacturers pulling back somewhat, at least for now.
Chad Moutray is chief economist, National Association of Manufacturers.