The Kansas City Federal Reserve Bank reported that manufacturing sentiment rebounded in January from the brief contraction in December. The composite index of general business activity rose from -3 to 5. The improvement came from growth in new orders (up from 1 to 5), shipments (up from -10 to 3), and exports (up from -6 to 4). While none of these figures suggest robust growth, it was nice to see some progress, particularly for those measures that shifted from contraction to modest gains.
The data also show a continued drop in output, which the Kansas City Fed attributes to “weather-related delays.” The indices for production and the average employee workweek both contracted for the second straight month.
Nonetheless, even with the decline in production in January’s report (which is probably temporary), manufacturers in the District continued to be mostly upbeat about the coming months. Several of the sample comments provided by the Kansas City Fed tend to back this up. As one respondent said, “Weather and year-end slowdowns were a factor in how the year ended. We are cautiously optimistic that 2014 will bring improvement, or at least a situation where customers complete their inventory reductions and must purchase what they are consuming.”
Along those lines, the forward-looking indicators were generally higher, reflecting the mostly upbeat sentiment seen in the comments. The composite measure of business activity six months from now rose from 15 to 26. That was the fastest pace for that index since February 2011. Indeed, the future-oriented subcomponents were all higher, including new orders (up from 24 to 35), shipments (up from 24 to 35), employment (up from 15 to 29), and capital spending (up from 12 to 26). On the negative side, pricing pressures for raw materials were also anticipated to accelerate, up from 27 to 47.Yet, overwhelming, the data support the pickup in activity that we were seeing nationally at the end of 2013.
In other findings, the sample comments tend to highlight the importance of the global market for growth, but they also focus on some challenges. This includes the challenge of finding new workers, and government uncertainty related to the implementation of the health care law and the “lack of a clear direction about taxes and economic policy.” That commenter suggested that such uncertainties are “causing businesses to hold back.”
Chad Moutray is the chief economist, National Association of Manufacturers.
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