Survey of Tenth District Manufacturers
by Chad R. Wilkerson
Manufacturing activity in the Tenth Federal Reserve District continued to grow strongly in February. The year-over-year production and new orders indexes edged higher, and the year-over-year employment index rose solidly into positive territory for the first time in four years. In addition, firms’ optimism about future activity improved despite increasing concerns over rising input costs. While the month-over-month production index edged down slightly, 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 rose to 27 in February, up slightly from 24 in January but down slightly from the six-year highs posted during the fourth quarter of 2003 (Tables 1 & 2). Year-over-year growth in production edged higher at both durable- and nondurable-goods-producing firms, with durable producers continuing to report very solid year-over-year gains and nondurable producers reporting somewhat more modest gains. While sample sizes make it more difficult to draw firm conclusions about individual states, the data available suggest that production was above year-ago levels in all district states but Colorado.
Like the production index, most other year-over-year indexes of factory activity either rose slightly in February or remained at January’s solid levels. Perhaps most notably, the employment index jumped to 12, its highest reading since mid-1998 and first reading above 5 since early 2000. In addition, the shipments and new orders indexes each rose moderately. The inventory indexes—-for both raw materials and finished goods—-rose back above zero after dropping in January. The backlog and capital expenditures indexes also posted modest gains, while the workweek, exports, and supplier delivery time indexes were largely unchanged from recent months.
Price indexes for both raw materials and finished goods continued to edge upward. The year-over-year raw materials price index increased slightly to 50, matching a four-year high. Many firms reported continued increases in the price of steel in particular, but also in the costs of most energy-based products and numerous other materials. Meanwhile, the year-over-year finished goods price index also continued to edge higher, suggesting firms were having slightly more success raising their selling prices. After rising to 8 in January, the finished goods price index increased to 11 in February, the highest reading since August 2001.
Expectations for future factory activity rebounded somewhat in February, and firms showed somewhat more confidence in their ability to pass cost increases onto their customers. The future production index rose back to 43 in February, after dropping to 33 in January from record highs in the fourth quarter of 2003. The future new orders and shipments indexes also rose slightly after falling in January, and the future capital expenditures index increased to 23, its highest reading since early 1998. In contrast to the rebound in optimism regarding future production and investment, the future employment index was largely unchanged in February and, at 13, remained lower than during several periods over the past few years. 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 42 to 48, as firms anticipate further increases in the price of steel and other materials. Meanwhile, the future finished goods price index rose by a larger amount, from 15 in January to 25 in February, matching its highest reading since 1995 and suggesting that firms expect some pricing power to return in coming months.
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