Two manufacturing surveys released this morning show that even as we have seen some signs of progress in a number of economic indicators, there continue to be some weaknesses in the Midwest in the latest data.
First, the Kansas City Federal Reserve Bank said that manufacturing activity in its District contracted at a slower rate in March, but it has now contracted for six straight months. The composite index improved from -10 in February to -5 in March. After sharp declines in new orders and shipments the month before, both figures were unchanged this month. That helped to slow the rate of decline in overall sentiment.
Yet, it is clear that manufacturers in this region tend to be one of the more pessimistic of any of the other Fed regional surveys regarding the current economic environment. Many of the key indicators were negative, with some of them strongly so. For instance, the index for the number of employees swung from +2 (slight growth) to -15 (strong decline). The employment data have been negative four of the past six months, suggesting a high degree of skittishness toward hiring in the Fed District. Other contracting figures included the orders backlog, the average employee workweek, export orders, and raw material inventories.
The comments usually provide some context to the index data, and they reflect the negative perceptions seen in the numbers. Respondents noted some persistent macroeconomic uncertainties, as well as higher costs. Healthcare was mentioned in two of them, with one saying, “Until the final rules of our cost for healthcare are known, we are not hiring.” Another individual added, “Our customers are preparing for the increased healthcare costs and higher petroleum costs.” The issue of how manufacturers will implement the Affordable Care Act has certainly risen to the forefront for many businesses, with rising healthcare costs the top concern in the latest NAM/IndustryWeek Survey of Manufacturers.
With all of that said, manufacturers in the Kansas City Fed District are more optimistic about the next six months than they are about the current macro situation. This is consistent with other regions, as well. The forward-looking composite index increased from 12 to 26, its highest point since September, and measures for new orders, shipments, capital spending, and employment are all expected to increase.
Elsewhere in the Midwest, ISM-Chicago and Deutsche Börse reported that the Chicago Business Barometer declined from 56.8 in February to 52.4 in March. This suggests slower growth in the Midwest region, mainly due to an easing in the pace of sales and production. The new orders index declined from 60.2 to 53.0, shifting from relatively strong growth to something more modest. Likewise, the production measure dropped from 60.2 to 51.8. One negative in this data was that order backlogs contracted, after slightly growing last month.
Despite the easing in activity, manufacturers in the Chicago region continue to increase their hiring. The employment index decreased from 55.7 to 55.1, but the good news is that the sector’s hiring growth has been positive for three straight months. This suggests a degree of cautious optimism moving forward. Along those lines, inventories declined significantly, down from 50.1 to 41.0. This could be a good proxy for future production, particularly if sales pick up. Capital investment data were also strong.
Chad Moutray is chief economist, National Association of Manufacturers.
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