Two manufacturing surveys released this morning provide a mixed picture of what is happening in the Midwest, with one showing a strong rebound and the other reflecting continued weaknesses.
For its part, the Kansas City Federal Reserve Bank reported that manufacturing activity in its District contracted for the fifth consecutive month. The composite index of general business activity fell from -2 in January to -10 in February. All of the key measures of activity were down sharply across-the-board, including new orders, shipments, production, the average workweek, and inventories. For example, the index for sales dropped from -2 to -25, the largest shift of any of the sub-components. As is often the case, worries about sales tend to depress sentiment.
The sample comments provided some reference to significant decline. One respondent cited the bad weather, with blizzard conditions in the Kansas City region closing facilities. This individual said, “That is putting us behind last year.”
Many of the other comments centered on the across-the-board federal budget cuts, which are slated to go into effect on March 1. A manufacturer said, “Very concerned about the reduction in military spending which will likely happen. This could force us to reduce planned capital spending.” Another respondent added, “Sequestration is causing customers to delay and/or push back orders.”
Despite the dramatically lower data for February, manufacturers in the Kansas City Fed District remained cautiously optimistic about higher activity over the next six months, albeit less so that in January. The forward-looking composite index decreased from 7 to 4, but the index for new orders was still strong at 15 (down from 19 the month before). While hiring is expected to increase slowly in the coming months, the manufacturers surveys anticipate capital spending to rise (up from 3 to 18). (continue reading…)