Kansas City Fed: Manufacturing Outlook Remained Very Optimistic in March, but with Accelerating Costs

The Kansas City Federal Reserve Bank reported that manufacturing activity continued to expand strongly in March, with the composite index of general business conditions unchanged at 17. Employment remained one of the bright spots in the latest survey (up from 23 to 26), with the index rising to a new all-time high in the survey’s 17-year history. This reflects an ever-tightening labor market, with the average workweek also widening to the best reading in seven years (up from 11 to 15). At the same time, production (down from 21 to 20) and shipments (down from 24 to 12) slowed a little in March, with new orders contracting for the first time since August 2016 (down from 16 to -1). Exports were also softer than desired (down from 2 to 1).

On the downside, the index for prices paid for raw materials soared to the highest point since April 2011 (up from 50 to 55), mirroring other recent indicators showing accelerating input costs. Nearly 60 percent of manufacturing leaders responding to the survey said their raw material costs increased in March, with just 4 percent noting reductions and 37 percent suggesting no changes. This is a trend that is expected to continue moving forward, with the forward-looking index for input costs edging down from a seven-year high but continuing to be very highly elevated (down from 73 to 72). Accordingly, 74 percent of manufacturers in the Kansas City Federal Reserve district see raw material prices rising over the next six months, with 4 percent predicting declines for their firm.

Meanwhile, manufacturers remained upbeat about the next six months, even with some easing in March’s survey. The future-oriented composite index pulled back from February’s all-time high reading of 38 to 33 in March. Fifty-seven percent of respondents anticipate higher new orders, production and shipments in the coming months, with 47 percent and 42 percent seeing more employment and capital spending, respectively.

Chad Moutray

Chad Moutray

Chad Moutray is chief economist for the National Association of Manufacturers (NAM) and the Director of the Center for Manufacturing Research for The Manufacturing Institute, where he serves as the NAM’s economic forecaster and spokesperson on economic issues. He frequently comments on current economic conditions for manufacturers through professional presentations and media interviews. He has appeared on Bloomberg, CNBC, C-SPAN, Fox Business and Fox News, among other news outlets.
Chad Moutray

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