Friday, September 10, 2010

The Beige Book, Part II

Let's continue our look at the Beige Book by focusing on manufacturing.

Manufacturing activity expanded further on balance, although the pace of growth appeared to be slower than earlier in the year. Most Districts reported further gains in production activity and sales across a broad spectrum of manufacturing industries. However, New York, Richmond, Atlanta, and Chicago noted that the overall pace of growth slowed, while Philadelphia, Cleveland, and Kansas City reported that demand softened compared with the previous reporting period. Recent weakness was most notable for construction-related products, according to reports from Cleveland, Richmond, Chicago, Dallas, and San Francisco. By contrast, orders and activity edged up for makers of steel and other metals in Cleveland, Chicago, and St. Louis, propelled largely by demand from the transportation equipment industry. Activity among automobile makers and parts suppliers rose further in Richmond and held steady in Chicago, although it dropped temporarily in Cleveland as a result of factory retooling. Manufacturing activity for commercial aircraft was steady in the Dallas and San Francisco Districts, although a contact in Boston reported that the industry's recovery has been slow. In the Boston and San Francisco Districts, makers of semiconductors and other high-tech products saw further sales gains, while Dallas noted that demand held largely steady at existing high levels. Among nondurable products, food processing stepped up in Philadelphia and San Francisco. Demand conditions for paper products were mixed, with increased sales and expansion plans noted in Minneapolis and St. Louis but flat to declining sales identified in Dallas. Export demand was an important contributor to healthy conditions in the manufacturing sector according to Boston and Chicago, notably for heavy machinery and autos.

Reports on capacity utilization were mixed. Manufacturers of high-tech products have been operating near maximum capacity of late, although this partly reflects a substantial decline in industry-wide capacity over the past three years, as noted by Dallas. More generally, the majority of Cleveland's manufacturing contacts reported that capacity utilization remained below pre-recession levels. Capital spending plans for manufacturers and firms in other industries generally indicate little change or modest increases in coming months, based on reports from the Boston, Philadelphia, Cleveland, Chicago, Kansas City, and San Francisco Districts.

Before we look at the regional reports, here are some takeaways from the previous points.

1.) The weakness in the housing markets appears to be a prime reason for the recent drop in manufacturing numbers.

2.) Auto and semi manufacturing appears to be in good shape

3.) Paper is mixed. This is a manufacturing sector that applies to all manufacturers, as everybody uses paper in one form or another.

4.) Aircraft manufacturing is fair.

5.) Exports are a a big source of demand.

Let's look at the regional reports:

Boston: Nearly all manufacturing firms surveyed report favorable results for the second quarter. Demand is particularly strong at semiconductor and pharmaceutical firms. One respondent from a long-standing business describes the second quarter as their best ever. In contrast, a parts supplier for the aircraft industry says that demand has been slow to recover from the recession. Sales held steady in recent weeks among many contacted manufacturers; multiple respondents attribute recent demand to booming business in northern and western Europe. The same firms describe domestic sales as flat in comparison. In addition, several diversified manufacturers and one large domestic industrial manufacturer all note that sales leveled off in recent weeks relative to the first half of the year.

NY: Manufacturing firms in the District report some leveling off in conditions in July and August, after reporting fairly widespread improvement during the first half of the year. However, a sizable number of manufacturing contacts indicate that they are increasing employment.

Philly: Third District manufacturers reported slight decreases in shipments and new orders from July to August, on balance, as well as a decrease in order backlogs. Slower activity was reported in most of the major manufacturing sectors in the District. However, producers of wood products, food products, industrial materials, and measuring and testing equipment reported increased demand for their products.

Cleveland: Reports from District factories show that production levels were mainly steady or down slightly during the past six weeks. Changes in new orders mirrored those in output. Production was higher on a year-over-year basis, with several contacts citing double-digit increases. A large majority of respondents expect output will stay at current levels for the near term. Those anticipating a drop in production attributed it primarily to seasonal factors or the continuing slump in residential construction. Most steel producers and service centers reported that volume was stable or increasing. Shipments are being driven by energy-related, auto, and heavy equipment industries. Construction volume remains weak.

Richmond: District manufacturing activity continued to expand in late July and August, but some sources indicated a slowdown in demand over the last month. A chemical manufacturer commented that new equipment was being installed at his company with the expectation that the economy would continue to grow. Moreover, a packaging manufacturer informed us that demand was stronger at his company, and a parts supplier indicated that raw material inventories had decreased and his suppliers were having a hard time keeping up with demand at his firm. He added that his company was working Saturdays to meet demand and that inventories of finished goods remained below desired levels. A majority of survey respondents reported that shipments, new orders, and employment continued to grow, but at a slower pace than a month ago. Some declines were reported; for example, a manufacturer of exterior doors for residential housing said that all activity had ground to a halt in the building products industry. He noted that the slowdown started in May and continued through August.

Atlanta: Manufacturing contacts reported that overall activity was expanding, but at a slower pace than in the previous report. Fewer District manufacturers noted increases in new orders, and more said that orders were lower.

Chicago: Manufacturing production growth slowed from the previous reporting period. Contacts indicated it was difficult to gauge the extent of the recent softening as July and August, in general, tend to be slower. In a positive sign, several metals manufacturers indicated that orders and inquiries had begun to firm in recent weeks. Manufacturers of construction materials and household goods reported declines in shipments, with the exception of household appliances where inventory continued to be rebuilt in the aftermath of the recent rebate programs.

St. Louis: Manufacturing activity has continued to increase since our previous report. Several manufacturers reported plans to open plants and expand operations in the near future, while a smaller number of contacts reported plans to close plants and reduce operations. Firms in the soap and cleaning compound, aerospace products and parts, glass products, motor vehicle parts, and primary metal manufacturing industries reported plans to open new facilities in the District and hire employees. Contacts in the food, engine, adhesive, and sanitary paper products manufacturing industries reported plans to expand existing facilities and operations. In contrast, firms in the furniture, hand tool, and power transmission equipment manufacturing industries announced plans to decrease operations and lay off workers.

Minneapolis: Manufacturing output was up since the last report. A July survey of purchasing managers by Creighton University (Omaha, Neb.) showed strong increases in manufacturing activity in Minnesota and South Dakota, and slight increases in North Dakota. A drainage pipe maker is opening a plant in South Dakota. In Minnesota, two new solar energy component manufacturing facilities are planned. In the Upper Peninsula of Michigan, a coated paper company noted an increase in orders over the past two months from earlier this year and last year.

KC: Manufacturing activity slowed in late July and August, while other business activity continued to expand. Factory production was flat compared to previous months, while shipments and new orders weakened. A producer of chemicals said distributors were only placing orders for product as needed and were unwilling to bring in inventory due to high levels of economic uncertainty.

Dallas: Most producers of construction-related materials--including brick, lumber, cement, glass and primary and fabricated metals--said conditions remained weak. Several respondents tied to housing construction said orders were especially low in July because of the vacuum created by the end of the tax credit. Contacts that produce products used in nonresidential construction noted most activity was related to public projects. Outlooks were slightly more pessimistic than in the last report, with several contacts expecting no turnaround until 2012. A primary metals producer that sells to transportation manufacturers was more upbeat and expects increased orders in coming months.

Manufacturers of high-tech products said demand held steady over the past six weeks. Growth in orders has leveled off in recent months after a replenishment of inventories earlier in the year that drove very strong growth. Most respondents characterize current order levels as good. Although inventories have increased, respondents said they are relatively lean and in some cases below desired levels. Several semiconductor contacts said that industry-wide capacity has fallen about 30 percent over the past three years and, even with growing capital expenditures, capacity utilization is likely to remain very high for the next two to three years. Outlooks were positive for the remainder of the year.

Paper manufacturers reported flat to declining sales over the past six weeks. Contacts said customers are very cautious about keeping inventories, due to pessimistic economic outlooks. Growth in demand for food products stalled since the last report. Respondents said they did not see the normal summer boost this year.

Non-defense aircraft manufacturers said orders held steady over the past six weeks and are above year-ago levels. Outlooks were cautiously optimistic. Trailer producers said demand had fallen as uncertainty about the national economy increased. Sales are expected to be slow through year-end.

Petrochemical producers were mostly optimistic, noting domestic orders were strong and growing. Export growth was positive but slower, as current prices were less competitive in Europe and Asia. The only reported weakness was for vinyl products used in housing and commercial construction. Refiners noted weaker conditions as seasonal gains in gasoline consumption did not materialize and distillate (diesel and heating oil) consumption slipped back. Contacts expect a decline in capacity utilization rates and refining runs due to weaker margins.

SF: District manufacturing activity generally continued to grow during the reporting period of mid-July through the end of August. Demand strengthened further for manufacturers of semiconductors and other technology products, with high levels of capacity utilization and balanced inventories noted. While new orders remained limited for makers of commercial aircraft and parts, extensive order backlogs kept production rates near capacity limits. Activity at petroleum refineries rose in response to increased demand, although inventories remained at elevated levels. Food manufacturers reported further growth in sales. By contrast, demand for wood products deteriorated, reportedly as a result of a slowdown in new home construction as well as residential repair and remodeling activity.

The above anecdotal information paint a picture of a slowing manufacturing sector.

Here are some charts of the various regions manufacturing indexes:

The Texas index is right around 0.

The Richmond Fed's index is still positive.

The Philly Fed Index printed negative last month for the first time in awhile.

The Empire State index (above) is still positive, but recent readings make it just so.

Also consider these macro level charts:

Overall industrial production continues to increase, as does

capacity utilization.

Finally, let's look at the latest ISM Manufacturing index. This was released on September 1 and the Beige Book covered the period before August 30.

"Manufacturing activity continued at a very positive rate in August as the PMI rose slightly when compared to July. In terms of month-over-month improvement, the Production and Employment Indexes experienced the greatest gains, while new orders continued to grow but at a slightly slower rate. August represents the 13th consecutive month of growth in U.S. manufacturing."

Eleven of the 18 manufacturing industries are reporting growth in August, in the following order: Primary Metals; Apparel, Leather & Allied Products; Transportation Equipment; Fabricated Metal Products; Electrical Equipment, Appliances & Components; Miscellaneous Manufacturing; Computer & Electronic Products; Paper Products; Chemical Products; Food, Beverage & Tobacco Products; and Printing & Related Support Activities. The five industries reporting contraction in August are: Furniture & Related Products; Petroleum & Coal Products; Nonmetallic Mineral Products; Plastics & Rubber Products; and Machinery.

What respondents are saying:

  • "Still experiencing intermittent delays in electronic components due to capacity and raw materials." (Electrical Equipment, Appliances & Components)
  • "International sales are especially strong. Domestic business is solid." (Chemical Products)
  • "Orders and business still strong." (Primary Metals)
  • "Order rate has slowed some. Supplier capacity in general seems to be improved." (Machinery)
  • "Large customers reducing pull rates for production." (Computer & Electronic Products)
And finally, here is the chart:

The short version is all the data points to a slowdown, largely caused by the housing situation. All other areas seem to be in decent shape.