The Kansas City Federal Reserve Bank reported that manufacturing activity continued to expand strongly in February, building on solid growth seen over the past year. The composite index of general business conditions increased from 16 in January to 17 in February, a four-month high. Many of the key underlying data points also reflected faster growth for the month, including new orders (up from 14 to 16), production (up from 16 to 21), shipments (up from 14 to 24), employment (up from 18 to 23) and the average workweek (up from 2 to 11). Forty percent of respondents said new orders increased in February, with 24 percent citing reduced sales. At the same time, exports slowed somewhat but remained positive for the third straight report (down from 6 to 2).
On the downside, the index for prices paid for raw materials soared to its highest point since May 2011 (up from 34 to 50), mirroring other recent indicators showing accelerating input costs. Half of the manufacturing leaders responding to the survey said their raw material costs rose in February, with just 2 percent noting reductions and 48 percent suggesting no changes. This is a trend that is expected to continue moving forward, with the forward-looking index for input costs (up from 58 to 73) jumping to a level not seen since March 2011. Accordingly, 69 percent of manufacturers in the Kansas City Federal Reserve district see raw material prices rising over the next six months, with 1 percent predicting declines for their firm.
Meanwhile, manufacturers feel more optimistic about the next six months. The future-oriented composite index increased from 29 to 38, an all-time high in the survey’s 17-year history. More than 60 percent of respondents anticipate higher new orders, production and shipments in the coming months, with 46 percent and 48 percent seeing more employment and capital spending, respectively.