Two manufacturing surveys released this morning provide a mixed picture of what is happening in the Midwest, with one showing a strong rebound and the other reflecting continued weaknesses.
For its part, the Kansas City Federal Reserve Bank reported that manufacturing activity in its District contracted for the fifth consecutive month. The composite index of general business activity fell from -2 in January to -10 in February. All of the key measures of activity were down sharply across-the-board, including new orders, shipments, production, the average workweek, and inventories. For example, the index for sales dropped from -2 to -25, the largest shift of any of the sub-components. As is often the case, worries about sales tend to depress sentiment.
The sample comments provided some reference to significant decline. One respondent cited the bad weather, with blizzard conditions in the Kansas City region closing facilities. This individual said, “That is putting us behind last year.”
Many of the other comments centered on the across-the-board federal budget cuts, which are slated to go into effect on March 1. A manufacturer said, “Very concerned about the reduction in military spending which will likely happen. This could force us to reduce planned capital spending.” Another respondent added, “Sequestration is causing customers to delay and/or push back orders.”
Despite the dramatically lower data for February, manufacturers in the Kansas City Fed District remained cautiously optimistic about higher activity over the next six months, albeit less so that in January. The forward-looking composite index decreased from 7 to 4, but the index for new orders was still strong at 15 (down from 19 the month before). While hiring is expected to increase slowly in the coming months, the manufacturers surveys anticipate capital spending to rise (up from 3 to 18).
In more positive news from the Midwest, ISM-Chicago and Deutsche Börse said that the Chicago Business Barometer rose from 55.6 in January to 56.8 in February. This suggests that the stronger production measures observed in January has continued and grown in February. From September to December, activity had been roughly flat. Moreover, the February index value is the highest it has been in 11 months.
Strong growth in sales and output has pushed the Barometer higher in 2013. For instance, the new orders index, which had contracted in November and was unchanged in December, measured 58.2 in January and 60.2 in February. The production index was also 60.2, following the 60.9 value seen the month before. Hiring and capital spending were both positive, with some easing from the month before, and inventory levels essentially did not grow.
The Chicago region’s data have tended to be more optimistic than from other parts of the country. The Midwest Manufacturing Index from the Chicago Fed recently reflected a similar upturn in activity in its District, boosted especially by increased motor vehicle production.
Chad Moutray is chief economist, National Association of Manufacturers.
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