Survey of Tenth District Manufacturers
by Chad R. Wilkerson
Manufacturing activity in the Tenth Federal Reserve District expanded strongly in April. The year-over-year production index rose markedly, and the shipments and new orders indexes rose to their highest levels in the 10-year history of the survey. The employment and capital spending indexes also continued to improve. The year-over-year raw materials price index reached a new high, as did the finished goods price index, as more firms than in previous surveys were able to pass cost increases through to customers. All of the month-over-month indexes of factory activity increased in April, 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 rose to 43 in April, up markedly from 31 in March, and the first reading in the 40s since early 1998 (Tables 1 & 2). The improvement in the production index in April was due to increased activity among durable goods manufacturers, although output at nondurable-goods-producing plants was above year-ago levels as well. While sample sizes make it more difficult to draw firm conclusions about individual states, the data available also suggest that production was at or above year-ago levels throughout the district.
Like the production index, most other year-over-year indexes of factory activity increased in April, and some were at record highs. The new orders index rose past 50 for the first time ever, and the shipments, backlog, workweek, and supplier delivery time indexes were also at survey highs. In addition, the employment and capital spending indexes both continued to rise. The inventory index for raw materials was slightly positive, and the finished goods inventory index was slightly negative. Both inventory indexes have remained close to zero for the last several months, suggesting that the long reduction in stock levels that began in early 2001 may have come to an end.
Price indexes for both raw materials and finished goods rose considerably in April. The year-over-year raw materials price index jumped from 64 to a survey high of 82, with only one firm reporting lower materials prices than a year ago. Likewise, the year-over-year finished goods price index surged from 19 to 37, also a survey high, as a higher percentage of firms than in previous surveys were able to pass cost increases through to customers.
Plant managers’ expectations for future factory activity remained very high. The future production and new orders indexes both rose to 46 after edging down in March. These readings are only moderately lower than the survey highs reached in the fourth quarter of 2003. With strong factory activity expected to continue, firms plan more hiring and investment than in previous surveys. The future employment index rose from 19 to 28, and the future capital spending index increased from 22 to 34. Concerns about material prices persisted, as the future raw materials price index rose from 55 to 65. Even so, a number of firms anticipate some easing in input price pressures heading forward. The future finished goods price index rose from 24 to 39, suggesting firms anticipate some improvement in pricing power heading forward. However, several firms also noted that future increases in output prices will likely be of smaller magnitude than recent price increases, due to a leveling off or decline in some materials prices.
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