Manufacturing activity continued to expand, with production and new orders rising across most Districts.
Manufacturing activity continued to expand, and several Districts reported gains in production or new orders across a wide range of industries. The only exceptions were the Philadelphia and Richmond Districts, where activity softened compared with the previous reporting period. Exports boosted manufacturing activity according to contacts in the Cleveland, Chicago, and Kansas City Districts. Producers of semiconductors and other high-tech equipment saw continued growth in sales in the Boston, Dallas, and San Francisco Districts. Auto production rose strongly in the Cleveland and Chicago Districts. Metals producers in the Chicago District reported that September sales were the strongest year-to-date, while contacts in the Minneapolis, Dallas, and San Francisco Districts saw only modest gains. Shipments of steel in the Cleveland District continued to be buoyed by demand from energy-related, automotive, and heavy equipment industries. Food processors in the Philadelphia and Dallas Districts noted solid demand for their products, while a few contacts in the St. Louis and Minneapolis Districts reported plans to expand existing operations.
The overall tone of the overview is better than expected: manufacturing was expanding; sales are growing; auto production was up strongly, solid demand existed for food processors, St. Louis and Minneapolis are looking to expand operations. This is in contrast to the latest industrial production report which showed a contraction of .2%.
Let's take a look at several parts of the ISM manufacturing numbers:
The overall index peaked near the 60 level a few months ago and has fallen to the 55 area. However, that is still an area of expansion according to the index.
The overall production index is also at high levels and has been there for some time.
However, the new orders index is near 50 and has dropped sharply over the last few months. While the number is still expansionary, it is very close to a recessionary reading.
New exports are also at strong levels. While their overall level has dropped over the last few months, they're still at decent levels.
I covered a fair amount of this information a few weeks ago in this post. However, since then, we've had two key reports from the East Coast -- the area of the country that was experiencing the worst of the manufacturing slowdown. The Empire State index showed improvement:
The general business conditions index climbed 12 points to 15.7, a clear gain over the relatively low but positive readings seen from July through September. This month, 35 percent of respondents—roughly the same share as in September—reported that conditions had improved over the month, while 20 percent reported that conditions had worsened, a significantly lower percentage than last month. The new orders index moved up 9 points, to 12.9. After turning negative in August and September, the shipments index rose above zero, climbing 20 points to 19.4. The unfilled orders index rose for a third consecutive month, but remained just below zero at -1.7. The delivery time index advanced several points, but also remained negative, suggesting that delivery times continued to shorten. The inventories index turned negative, falling 13 points to -11.7, its lowest level since January, indicating that inventory levels declined over the past month.
However, the Philly Fed continued to show weakness:
The Mid-Atlantic manufacturing sector continues to sputter. The Philly Fed's new order index, at minus 5.0 in October, continues to show month-to-month contraction though at a slightly slower rate than September's minus 8.1 or August's minus 7.1. Contraction in backlog orders is steady, at minus 8.9 vs. the prior months' minus 8.5 and minus 7.1 before that.
Lightness in the pipeline makes manufacturers nervous about inventories. Manufacturing inventories in the region, in contrast to the nation, are coming down fast, at minus 18.6 in October following minus 16.7 in August and minus 11.6 in July. Manufacturers continue to report a lack of pricing power for finished goods with the prices received index down around the 12 level the last three months. Shipments are steady and employment has edged higher the past two months. Yet the decline in orders doesn't point to future gains for shipments or employment.
A positive not to be overlooked is sudden optimism in the six-month outlook where indications for new orders, shipments and employment all just about doubled in strength. The Mid-Atlantic region may be sagging yet the weakness may be isolated and may only be temporary.
Let's look at the information from the Fed Districts:
Boston: Nearly all contacted manufacturing firms report continued sales growth in the second half of the year after very strong first-half results. One semiconductor firm reports record sales and profitability in the third quarter and other firms selling into semiconductor-related markets also report robust growth. Some of this growth is fueled by strong demand overseas, but some is also coming domestically from the auto industry. Business also remains very strong at a technology services firm. However, a number of firms note that even as sales continue to increase on a year-over-year basis, demand has slowed relative to the first half of 2010. One firm, which manufactures products for the residential real estate market, attributes this deceleration to some of its customers destocking after buying in anticipation of second half demand that never fully materialized; this firm expects sluggish demand going forward. Overall sentiment amongst responding manufacturers is that demand will continue to be subdued for the rest of the year and into 2011, although few, if any, expect conditions to worsen.
NY: Manufacturing firms in the District report a pickup in activity in September, following a pause in July and August, and a growing proportion of manufacturing contacts indicate that they are increasing employment and plan to add more workers in the months ahead. (see also the link to the Empire State index above)
Philly: Third District manufacturers reported slight decreases in shipments and new orders from August to September, on balance, as well as a decrease in order backlogs. Despite the generally slower activity among the region's manufacturing industries, some sectors reported increases in demand for their products, notably makers of industrial machinery and equipment, producers of wood products, and food processers.
Cleveland: Reports from District factories showed that new orders and production rose modestly during the past six weeks. Production was also higher on a year-over-year basis, with many contacts experiencing double-digit increases. Several manufacturers commented that opportunities are growing faster in offshore markets than domestically. Almost all of our respondents expect business activity to follow current seasonal trends for the near term. Most steel producers and service centers reported that volume was either flat or trending up. Shipments are being driven by energy-related, auto, and heavy equipment industries. Two contacts noted that exports are gaining strength. All of our steel contacts expect little change in business activity in the near term. District auto production showed a large increase during August on a month-over-month basis, due to production starts on the 2011 models. In terms of year-over-year comparisons, production was little changed for both domestic and foreign nameplates.
Richmond: District manufacturing edged down in September after expanding for the last seven months, with reports of sharp declines that were partially offset by pockets of strength. Several textile and apparel contacts described their business as having "no depth" and noted that their customers expressed uncertainty about the direction of their business. A tire manufacturer reported that a backlog of orders had "tanked" and the company had cut production, noting that he did not expect any improvement for the rest of the year. A manufacturer of exterior doors for residential housing said that his firm had seen a sharp drop-off in orders and shipments over the last several months, with no indication that the trend might reverse. He anticipated that the housing and building products sector would be anemic in 2011. However, a furniture manufacturer reported an increase in orders and noted that his customers said that Labor Day sales were better than anticipated and held up throughout September. In addition, an auto parts supplier stated that orders remained strong and had increased slightly over the last month. Finally, our survey contacts reported that raw materials and finished goods prices, as well as wages, increased at a slower pace than in our last report.
Atlanta: District manufacturers indicated that the growth of new orders slowed notably and that production was flat in September compared to the previous month. However, many respondents planned modest production increases in the short-term.
Chicago: Manufacturing production increased in September, refreshing from the late summer pause. Several metals manufacturers reported that September sales were the best so far this year. Power generation, mining, and medical equipment manufacturers also reported an increase in orders. In addition, export activity continued to be robust with slower growth in developing countries in Asia and South America offset by strengthening demand from Europe. The automotive and heavy equipment sectors remained strong sources of growth. In contrast, a manufacturer of household appliances noted a reduction in fourth quarter production, and capacity utilization in the steel industry edged lower. Although contacts in some industries indicated that new orders and order backlogs had eased as inventory rebuilding slowed going into early October, manufacturers in general expressed a very positive outlook for the remainder of 2010 and early 2011.
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 or reduce operations. Firms in the detergent, frozen foods, transformer, plastic products, motor vehicle parts, and primary metal manufacturing industries reported plans to expand existing operations and hire new employees. Contacts in the construction machinery, electronic component, and wood product manufacturing industries reported plans to open new facilities in the District as well as hire new employees. In contrast, firms in the appliance, tobacco, chemical, and furniture manufacturing industries announced plans to decrease operations and lay off workers.
Minneapolis: Manufacturing output was up since the last report. A September 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. In Montana, a food processing company is expanding operations and a jet engine plant plans to build a facility. In Minnesota, a fishing tackle company recently experienced a big pickup in demand, a metal fabricator saw increased orders, a dental part maker noted increased sales and a bed manufacturer's recent sales were up and higher than anticipated.
Kansas City: The Tenth District's manufacturing sector reported a mild rebound following softness in the prior reporting period. Factory operators reported expanded production, shipments, and new orders, and firms remained optimistic about future production levels. Despite increased activity, few firms reported planned increases in capital spending or hiring in the coming six months. The rebound in activity produced an increase in backlogs and raised expectations for future backlogs. Some improvement was reported in orders for export markets, though expectations for further expansion remained modest. Inventories of both raw materials and finished goods were reported as in balance with no planned changes from existing levels. The strength reported in manufacturing did not spillover to transportation firms as contacts noted unexpected weakness in activity. Some high-tech firms reported sales growth, but expectations for improvement in the coming two quarters were subdued. Capital spending activity by high-tech firms continued its upward trend but firms reported somewhat diminished expectations for the upcoming six months.
Dallas: Most construction-related producers, including cement, lumber and fabricated metals firms, said orders remained flat over the past six weeks. Contacts believe soft demand is related to uncertainty about the economic and political environment. One glass contact said sales rose due to a pickup in apartment construction. Primary metals producers noted a slight uptick in business. Some contacts are selling to new markets, such as solar panel production. Others indicated that remodeling activity had boosted sales. Despite the increase, contacts believe the industry has a long road ahead.
Manufacturers of high-tech products said that sales and orders were growing at the same or slightly slower pace since the last report. Most respondents said inventories are below or at desired levels. Sales are expected to continue to grow at a moderate pace over the next six months, but there was increased uncertainty in respondents' outlooks.
Paper manufactures said orders were slightly down, in part because customers were managing inventories more tightly. Contacts expect sales growth to be anemic through year-end. Food producers said demand growth held steady. Sales growth of premium items had picked up, but orders for value items weakened. Most transportation manufacturers noted steady demand.
Petrochemical producers noted strong domestic demand for most products. Export growth continued to slow, reflecting higher prices, although there were reports of renewed Chinese interest in some products. Domestic orders for PVC used in commercial construction were weak, but exports were stronger, according to contacts. Refiners said conditions continued to weaken. Both margins and operating rates fell since the last report, and gasoline and distillate inventories have risen against seasonal expectations.
Frisco: District manufacturing activity expanded further on balance during the reporting period of September through early October. For manufacturers of semiconductors and other technology products, demand continued to grow, although the pace of growth slowed a bit and inventories rose slightly. Extensive order backlogs continued to keep production rates at or near capacity limits for manufacturers of commercial aircraft and parts. Demand firmed further for metal fabricators, although capacity utilization remained well below normal. Activity at petroleum refineries slowed a bit and inventories rose, as seasonal declines in domestic demand were only partly offset by increased overseas demand. Conditions in the wood products industry remained depressed.
Some observations, in no order of importance:
-- Textiles and construction/housing related industries are hurting
-- High tech manufacturing is doing well
-- Oil is fair
-- Exports will continue to be a source of strength,
-- The overall manufacturing sector is not hitting on all cylinders; some areas are doing well, while others are treading water
-- Autos are a surprising source of strength
-- There appears to still be a fair amount of caution in the air about the future
-- The Richmond and Atlanta Districts are a pocket of weakness, probably due to their mix of manufacturing industries.
-- On balance, it seems there are more positive developments than negative. But, there is enough weakness for concern going forward.