The Kansas City Federal Reserve Bank reported that manufacturing activity contracted somewhat in December, the first decline in six months. At the same time, the bank cautioned against reading too much into the decrease. Chad Wilkerson, vice president and economist at the Kansas City Fed said, “The drop in regional factory activity appears like it will be temporary, and was at least partly driven by bad weather.” He went on to add, “Firms remain generally optimistic about the first half of 2014, despite continued uncertainty about fiscal policy and regulations.”
The drop in activity in December was across-the-board. Production (down from 11 to -17), shipments (down from 3 to -14), export sales (down from -4 to -6), and the average workweek (down from 5 to -2) all contracted for the month. Meanwhile, new orders shifted from strong growth in November (15) to being flat in December (zero). In terms of employment growth, the pace of hiring also decelerated a bit (down from 6 to 2), but remains slightly positive.
Despite the decreases in December, manufacturers in the Kansas City Fed region continue to reflect optimism for the next six months. The forward-looking composite index rose from 12 to 14, and measures for expected production (up from 21 to 29), shipments (up from 27 to 30), and new orders (up from 16 to 22) grew at a stronger pace. In fact, 44 percent of respondents anticipate higher sales in the next six months, with just 21 percent forecasting reductions in their orders.
Even with the increased confidence, those taking the survey remain somewhat hesitant on the hiring front. Thirty percent plan to add new workers in the first half of 2014, but half of them see no changes in their employment levels. Similarly, the percentage of respondents planning increases in their capital expenditures in the next six months dropped from 50 percent in the last survey to 43 percent in this one. On a positive note, each of these indicators suggests that employment and capital investments should continue to grow moving forward, albeit at a slower pace than before.
Chad Moutray is the chief economist, National Association of Manufacturers.
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