The Kansas City Federal Reserve Bank said that manufacturing activity has now increased in three of the past four months. The composite index of general business activity increased from 6 in July to 8 in August, the highest level observed since May 2012. This figure was buoyed by strong gains in new orders, production, and shipments. The new orders index, for instance, rose from 5 to 15, suggesting decent improvements have occurred in the district’s marketplace since June, when sales were reported to be negative. Exports were also marginally higher.
At the same time, the employment picture looks modestly better, with hiring and the average workweek shifting from slight negatives to slight positives. The index for employment increased from -2 to 4, and the average workweek index grew from -6 to 8.
Even as the data suggest progress in the region, the sample comments suggest that manufacturers in the Kansas City Fed district have been negatively impacted by across-the-board federal spending cuts. For example, one respondent said, “Sequestration is hitting us very hard. The heavy infrastructure market is way down due to lack of federal spending.” Another added, “Our defense business is down significantly.” More generally, a manufacturer noted that demand for their products continued to be soft, dampening their outlook. Other comments referenced challenges in attracting a quality workforce and with health care cost increases resulting from the Affordable Care Act.
Despite these comments, the forward-looking questions about manufacturing activity suggest cautious optimism for the next six months. The expectation composite index increased from 7 to 9, with decent growth expected for sales, exports, production, and capital spending. With that said, the index for expected new orders did grow at a slower rate, down from 20 to 11. In addition, there are some measures which suggest some tentativeness moving ahead. The average employee workweek is expected to be just above neutral (down from 2 to 1). Overall, though, these data are similar to other sentiment surveys which tend to be more upbeat about activity in the second half of the year.
Chad Moutray is the chief economist, National Association of Manufacturers.
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