The Kansas City Federal Reserve Bank said that manufacturing activity has expanded every month so far in 2014, picking up slightly in July from June. The composite index of general business conditions rose from 6 in June to 9 in July. The pace of growth accelerated in many of the key indicators, including new orders (up from 8 to 12), production (up from 2 to 11), shipments (up from 2 to 14) and employment (up from 1 to 8). One-third of survey respondents said that their production had increased in the month.
There were two negatives in the report, as well. The average workweek (down from 7 to -3) shifted into its first contraction in six months. The percentage of those taking the survey who noted a reduced workweek increased from 12 percent in June to 17 percent in July, enough to tip the diffusion index. In addition, new export orders (up from -11 to -6) continued to fall, albeit at a slower pace of decline for the month. This measure has been in contraction territory in 8 of the past 12 months, indicating weakness on the trade front in the Kansas City Fed’s district.
Nonetheless, there continue to be encouraging signs for the months ahead. The forward-looking composite index increased from 12 to 15, with relatively strong growth anticipated over the next six months. Manufacturers in the region expect higher new orders (up from 14 to 24), production (up from 17 to 23), shipments (up from 20 to 28), employment (up from 14 to 23) and capital expenditures (up from 23 to 25) at rather healthy rates of growth. In fact, over 40 percent predict increased sales, output and shipments, with more than one-third seeing additional hiring and capital spending. Yet, the sample comments also suggest frustrations with attracting qualified workers. Exports are predicted to grow just modestly (unchanged at 6).
Respondents expect pricing pressures to remain elevated, with nearly half of those taking the survey saying that raw material prices should increase over the next six months. Still, 24 percent felt that input costs for them might fall, and the diffusion index for this measure (down from 49 to 46) eased slightly in July.
Chad Moutray is the chief economist, National Association of Manufacturers.