Survey of Tenth District Manufacturers
by Chad R. Wilkerson
Manufacturing activity in the Tenth Federal Reserve District continued to expand in January. The year-over-year production index fell somewhat from the five-year high reached in December and the year-over-year new orders index also eased moderately, but both indexes remained quite positive and well above levels posted in recent years. The six-month-ahead indexes for production and new orders also fell back somewhat, although the indexes were still just as high as they were last summer. The month-over-month production index rebounded solidly after dropping nearly to zero in December, but the monthly data are not seasonally adjusted, so caution must be taken in basing analyses on month-to-month comparisons. Until several years of data are available for seasonal adjustment, this report will focus primarily on changes in activity versus a year ago.
The net percentage of firms reporting year-over-year increases in production fell to 24 in January, down from readings in the low- to mid-30s during the fourth quarter of 2003 (Tables 1 & 2). Nevertheless, prior to October 2003, the last time a reading of higher than 24 was posted was in mid-1998. Year-over-year growth eased moderately at both durable- and nondurable-goods-producing firms, but durable producers continued to report solid year-over-year gains and nondurable producers also indicated production was slightly higher than a year ago. While sample sizes make it more difficult to draw firm conclusions about individual states, the data available suggest that production eased back below year-ago levels in Colorado and western Missouri but remained at or above year-ago levels in the rest of the district.
Like the production index, most other year-over-year indexes of factory activity fell somewhat in January but remained considerably higher than in recent years. The shipments index edged down from 29 to 27, and the new orders index dipped from 45 to 30. Likewise, the employment index fell back below zero in January after posting a positive reading in December for the first time in nearly four years. The capital expenditures index was basically unchanged from December, while the new orders for exports index continued to edge higher following the recent fall in the value of the dollar. The inventory indexes—after rising above zero in December for the first time in over a year—both fell back into negative territory in January. These low inventory levels should continue to provide a boost to production in coming months, as firms seek to replenish stocks after catching up with their strong sales growth during the second half of 2003.
There are tentative signs that greater demand for manufacturing goods in recent months may be allowing firms to pass some of their cost increases through to customers. The year-over-year finished goods price index rose to 8 in January, which, while still modest, was its highest reading since mid-2001. Meanwhile, the year-over-year raw materials index remained very high, at 48, as some firms reported modest increases in import prices and others reported continued increases in the price of steel.
Expectations for future factory activity in the Tenth District eased somewhat from the record levels posted during the fourth quarter of 2003, but firms were still generally as optimistic as they were last summer. The future production index fell from 49 to 33, and the future new orders index eased from 45 to 38. Despite the recent strong increase in demand for their products, firms continue to plan only moderate increases in hiring and investment heading forward. The future employment index edged down to 12 in January, and the future capital expenditures index was unchanged at 16. As for prices, firms continue to expect rising materials prices and a greater ability to pass cost increases through to customers. The future raw materials price index rose from 35 to 42. Meanwhile the future finished goods price index remained in the mid-teens, similar to November and December and up moderately from readings during much of the past four years.
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