Last week, the Federal Reserve published the Beige Book. This is one of my favorite economic documents, because it provides a regular complete overview of the US economy. Therefore, I'm going to spend a lot of time this week going over the data nd providing supplementary information, starting with manufacturing.
Let's start with the macro level summation:
The manufacturing sector continued to recover across all Districts. Contacts in the Richmond, Chicago, and St. Louis Districts identified a strong flow of new orders. Respondents in the Chicago District pointed to pent-up demand for both light and heavy motor vehicles, attributed to an aging fleet, as a key driver of activity in the manufacturing sector. The Cleveland District described orders as above expectations and respondents in the New York District noted that orders had picked up since the prior report. Overall, demand was generally characterized as stable and steady, and no District made mention of lingering fears of a double-dip recession, in contrast to the summer reporting periods. Capacity utilization continued to trend higher and is approaching normal rates for some contacts in the Cleveland and San Francisco Districts, while production in high-tech manufacturing was reportedly at high capacity in Dallas; some manufacturers in the St. Louis and Minneapolis Districts said they have or will soon expand capacity. Production levels increased in the Cleveland, Atlanta, Chicago, and Kansas City Districts. On the negative side, the Philadelphia District characterized the flow of new orders as "erratic," while the Boston, Atlanta, and Dallas Districts identified construction-related manufacturers as continuing to show considerable weakness, and makers of wood products in the St. Louis and San Francisco Districts reported very soft demand.The Boston, Cleveland, and San Francisco Districts reported concerns about input prices, particularly of commodities; manufacturers in the Boston, Cleveland, and Richmond Districts indicated they had experienced lengthening lead times, shortages, or other difficulty obtaining supplies of some inputs. Only St. Louis mentioned firms with substantial investment plans for 2011. Boston, Cleveland, Chicago, St. Louis, and Kansas City reported that some factories had plans to increase employment, although these hiring plans were typically characterized as modest. The Philadelphia, Cleveland, Chicago, Kansas City, Dallas, and San Francisco Districts described the 2011 manufacturing outlook as optimistic.
Overall, the above report is very positive. Demand is stable and strong across all districts. Pent-up demand is starting to show its ramifications; capacity utilization is increasing and some districts will have to start adding capacity.
There are three drawbacks to this report. First, construction related manufacturing is still suffering. This should not be surprising, but is still a concern. Second, input prices are starting to increase, and third, hiring plans are "modest."
Let's look at the district level information.
Boston: The majority of manufacturing firms surveyed continue to report relatively positive business conditions. The exceptions include one firm with exposure to the residential construction sector, whose business has been sluggish for an extended period, and a few others whose business tends to be a-cyclical. On the positive side, a small diversified manufacturer reports sales growth in the high single digits and notes that its revenues have returned to pre-recession levels. A company in the electronics business says that its sales growth in the fourth quarter was slightly ahead of expectations, but is likely to be somewhat inconsistent going forward due to uncertainty about future large contracts. In addition, sales at a semi-conductor firm remain strong relative to 2009 and are on par with their strong results in third quarter 2010; a food products manufacturer also reports strong sales.Manufacturing respondents have mixed, but generally positive outlooks for 2011. One firm reports being "very optimistic" about next year, while most are "cautiously optimistic." In comparison, the firm that has been struggling recently said the outlook for the next three to six months is "lackluster." Many contacted firms remain concerned about their health care costs going forward, and a few expect that the macroeconomic uncertainty will continue to weigh on their sales growth.
NY: The Empire State Manufacturing Survey indicates that conditions improved in December for New York State manufacturers. After dropping sharply into negative territory in November, the general business conditions index bounced back above zero, climbing 22 points to 10.6. The new orders and shipments indexes also rose above zero, while the unfilled orders index remained negative. The inventories index was negative, indicating that inventory levels were lower over the month. The indexes for both prices paid and prices received were positive and higher than last month, suggesting that prices rose, while employment indexes were negative, indicating that employment declined. Future indexes were generally at high levels—a sign that conditions were expected to improve over the next six months. Significantly, the future prices paid index was positive and rose sharply, indicating that respondents expected input prices to accelerate.
Philly: Third District manufacturers reported increases in shipments and new orders from November to December, on balance. However, gains were not spread among all of the region's major manufacturing industries. Increases in demand for their products were common among producers of furniture, chemicals, testing and measuring instruments, and food products. In contrast, producers of metals, other industrial materials, lumber products, electrical equipment, and machinery generally had month-to-month declines in orders, and other manufacturing sectors reported no change. Overall, the region's manufacturers continued to report that the flow of new orders has been erratic. Several used the words "hand to mouth" and "choppy" to describe the recent trend in orders.
Also consider these points from the latest Philly Manufacturing Survey: The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from a reading of 22.5 in November to 24.3 in December. The index has been positive for three consecutive months (see Chart). The demand for manufactured goods is showing continued improvement: The new orders index increased 4 points this month and has increased for three consecutive months. The shipments index declined 10 points, but it has remained positive for three consecutive months.
Price increases for inputs as well as firms’ own manufactured goods are more widespread this month. Fifty-two percent of the firms reported higher prices for inputs, compared with 38 percent in the previous month. The prices paid index, which increased 17 points this month, has increased 41 points over the past three months. On balance, firms also reported a rise in prices for manufactured goods: More firms reported increases in prices (21 percent) than reported decreases (10 percent), and the prices received index increased 13 points, its first positive reading in eight months.
Cleveland: Reports from District factories indicate that demand was stable or rising during the past six weeks. Compared to year-ago levels, production was higher, with many contacts experiencing low double-digit increases. Several manufacturers noted that while their production levels declined recently--following seasonal trends--orders were above expectations. In general, manufacturers are fairly optimistic and expect at least modest growth during 2011. A few noted that lead times for the delivery of raw materials were getting longer, which they attributed to rising demand across industry sectors. Steel producers and service centers all reported that shipping volume had increased since our last survey, with shipments being driven by energy-related, transportation, and heavy equipment industries. Steel executives we spoke with have heightened expectations for business growth during 2011. District auto production showed a slight decline during November on a month-over-month basis. Compared to a year ago, domestic auto makers showed a substantial rise in production, while foreign nameplates posted a modest decline.
Capacity utilization continues to trend higher, approaching what many of our respondents consider to be more normal rates. Inventories are close to targeted levels. Capital spending plans are conservative, with only a few of our contacts expecting to increase capital budgets for 2011. Outlays are aimed primarily at maintenance, equipment upgrades, and increasing production efficiencies. Prices for agricultural and metal commodities, steel, and scrap remain elevated, while the prices of most other raw materials have been stable. Several producers announced selective product price increases to reflect a rise in the cost of steel and agricultural commodities. Most contacts told us that they have expanded their permanent, full-time payrolls slightly since our last survey, and they will continue hiring at the same pace during 2011. Permanent new hires were largely salaried. To meet rising demand, employers are extending production hours or bringing in temporary hourly workers. Wage pressures are contained. Companies are continuing to restore merit increases and payments to 401K plans.
Richmond: Manufacturing activity posted solid gains in December, building on a pickup in October and November. A chemical producer indicated that shipments continued to improve and he expected his operating rate to be at 95 percent of capacity over the next year. He also expected exports, a major part of his recent business gains, to improve further in 2011. An auto-parts supplier said that demand from auto manufacturers continued to exceed initial forecasts, resulting in material shortages and higher supplier costs. A machinery manufacturer noted that his automotive business remained very strong and he anticipated additional strengthening in 2011. He pointed out that other industrial businesses were also picking up nicely. A building materials manufacturer reported that orders were surprisingly strong compared to three months ago, which he attributed at least in part to inventory restocking. Survey contacts reported that prices of raw materials grew at a somewhat quicker rate than in our last report, while prices of finished goods were little changed.
Also consider this summation of the Richmond Fed's manufacturing survey:
Manufacturing activity in the central Atlantic region expanded at a quicker pace in December according to the Richmond Fed's latest survey. All broad indicators — shipments, new orders and employment — posted solid gains. Other indicators also suggested stronger activity. District contacts reported that order backlogs returned to positive territory and capacity utilization grew at a faster pace. Manufacturers reported that delivery times grew at a somewhat higher rate, while inventories grew at a somewhat slower pace.
Looking ahead, manufacturers' assessments of business prospects for the next six months were generally more optimistic in December. Survey contacts at more firms anticipated that shipments, new orders, backlog of orders, capacity utilization, and capital expenditures would grow more quickly during the next six months.
Atlanta: Sixth District manufacturers reported a modest increase in new orders and production levels, while finished inventories contracted only slightly. Several respondents expressed plans to increase production in the short-term. Goods producers tied to the construction sector continued to report very low levels of activity. Manufacturing-related transportation companies reported moderating freight volumes after significant increases earlier this year. Regional rail shipments of farm products increased since the last report, nearly reaching double their year-ago level, while shipments of motor vehicles and equipment declined. The outlook among transportation firms remains optimistic for 2011 as moderate growth in shipments is expected for the first half of the year.
Chicago: Manufacturing production improved again in December. New orders were solid and order backlogs increased substantially. In general, contacts expressed a positive outlook for growth in manufacturing next year. Several manufacturers of tubes, hydraulics, and other fluid power products noted that activity had returned to its previous peak levels of 2008, and was expected to increase further in the coming year. The fabricated metals, automotive, and heavy equipment sectors were also expected to remain strong sources of growth. A contact reported that global steel consumption was likely to reach an all-time high in 2011. In addition, contacts noted that pent-up demand remains in the motor vehicles sector, with the average age of both light and heavy vehicles still rising. Demand for heavy trucks, in particular, was expected to be even stronger than previously anticipated. In contrast, a contact in the appliance industry noted that shipments were weaker than expected in the fourth quarter, but were still higher than the prior year.
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 automobile and automobile parts, plastics product, glass, furniture, sanitary paper products, and food manufacturing industries reported plans to expand existing operations and hire new employees. Contacts in the household appliance and paper manufacturing industries reported plans to open new facilities in the District and hire new employees. In contrast, firms in container manufacturing and wood products manufacturing announced plans to close plants and lay off workers.
Minneapolis: Manufacturing output was up since the last report. A December survey of purchasing managers by Creighton University (Omaha, Neb.) showed increases in manufacturing activity in Minnesota, South Dakota and North Dakota. A South Dakota maker of video display systems noted increased new orders since the last report. A Minnesota equipment component producer noted strong sales and was increasing production capacity. A bank director reported that regional manufacturers were busier than a year ago.
KC: District manufacturing activity strengthened further since the last survey, and plant managers were increasingly optimistic about future activity. Plant managers reported that production, shipments, and new orders increased in December, led by durable goods manufacturers. During the first half of 2011, manufacturers expected new orders, shipments and production to rise, and finished goods inventories to remain flat. Some factory managers planned to increase employment levels as well as capital spending in the coming months. Stronger demand for computer software and IT consulting contributed to a rise in sales at high-tech firms. Activity in the transportation sector slowed since the last survey period but remained above year-ago levels.
Also consider the latest KC Fed manufacturing report: The net percentage of firms reporting month-over-month increases in production in December was 21, unchanged from 21 in November and up from 10 in October (Tables 1 & 2, Chart). Specific industry activity was mixed, with the majority of durable firms reporting an increase in production while some nondurable firms noted a slight downturn. Most other month-over-month indicators improved somewhat from the previous month. The shipments and order backlog indexes climbed higher, and the new order index was basically flat. The employment index increased to its highest level in three years, while the new orders for exports index edged down from 11 to 7. The raw materials inventory index moved into positive territory, and the finished goods inventory index also inched higher.
Growth in year-over-year factory activity increased in December. The production index improved from 27 to 32, and the shipments, new orders, and order backlog indexes also edged up. The employment index rose for the second straight month to its highest level in nearly 3 years, and the capital expenditures index increased from 9 to 19. Both inventory indexes rose further from last month, after nearly two years of negative readings.
Future factory indexes improved considerably from the previous month. The future production index jumped from 23 to 41, and the future shipments, new orders, and order backlog indexes also rose. The future employment index increased from 13 to 27, and the future new orders for export index also edged higher. The future capital expenditures index improved from 12 to 22, a three-year high. The raw materials inventory index moved into positive territory for the first time since April, and the finished goods inventory index also increased from -5 to 0.
Price indexes continued to rise. The month-over-month finished goods price increased from 3 to 18, and the raw materials price index jumped from 35 to 54. The year-over-year finished goods price index climbed higher, and the raw materials price index edged up slightly from 62 to 67. The future raw materials price index recorded its highest level since mid-2008, and the future finished goods price index also increased, as slightly more firms plan to pass recent cost increases through to customers.Dallas: Most construction-related manufacturers reported steady demand at low levels, although there were reports of stronger demand related to apartment construction and business remodeling. Outlooks were generally more optimistic than in the last report, with contacts expecting some improvement this year.
Respondents in high-tech manufacturing said demand continued to grow at a moderate, sustainable pace since the last report. Contacts noted that production was at high capacity and inventories had increased from very lean to desired levels. Several firms said they had added slightly to payrolls. Areas of strength included smart phones and gaming consoles, while demand for computers was reported as "bouncing along the bottom." Most respondents expect growth to continue at a moderate pace for the next three to six months.
Responses from paper producers were mixed, but overall demand remains at low levels. Most expect conditions to remain stable as the economy slowly recovers. Food manufacturers noted improved sales during the reporting period. Transportation manufacturers also noted an increase in demand, and outlooks are for modest growth in 2011.
Petrochemical producers noted strong domestic and export demand, except for construction-related materials. North American producers of natural-gas based resins and plastics continue to enjoy significant advantages in export markets.
Demand for oil products continued to improve against normal seasonal trends. Refinery utilization rates moved up to the highest December levels since 2007. Margins held steady, despite the surge in the price of crude oil. Suppliers reported that refiners' confidence has improved.
Also consider these points from the latest Dallas Manufacturing Survey: Texas factory activity increased in December, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, was positive for the fourth consecutive month.
Other indicators of current activity also remained positive, signaling continued growth in manufacturing. The shipments index held steady at a reading of 8, and the capacity utilization index rose from 10 to 15, with 29 percent of manufacturers reporting an increase. The new orders index declined in December but stayed in positive territory, with more than three-fourths of firms noting increased or unchanged order volumes.
Measures of general business conditions remained positive in December. The general business activity index came in at 13, with nearly a quarter of respondents noting improved activity. The company outlook index edged down to 15, although the share of manufacturers who said their outlook improved rose to its highest level since May.
Labor market indicators improved notably this month. The employment index rose from 6 in November to 15 in December, reaching its highest level since early 2007. Twenty-four percent of firms reported hiring new workers, compared with 9 percent reporting layoffs. Hours worked increased again this month, and the wages and benefits index rose from 5 to 10.
SF: Manufacturing activity in the District continued to expand during the reporting period of late November through the end of December. Demand grew further for manufacturers of semiconductors and other technology products, with contacts noting balanced inventories and high levels of capacity utilization. Production rates remained at or near capacity for makers of commercial aircraft and parts, as an existing order backlog for larger aircraft was reinforced by rising orders for smaller commercial jets. Metal fabricators saw further increases in demand; sustained improvement has brought capacity utilization back near normal and prompted some firms to rehire employees laid-off over the past two years. Petroleum refiners continued to reduce their output and work down inventories, which have been at elevated levels in recent months. Conditions remained depressed for manufacturers of wood products.
In addition, consider the following charts of macro-level data:
While not at pre-recession levels, industrial production continues to move higher. The latest report was very strong.
Overall capacity utilization also continues its move higher.
Overall manufacturing activity is at pre-recession levels.
New orders have bounced back over the last three months and
New orders for durable goods is still moving higher, although it is not at pre-recession levels yet.
Here are my conclusions, in no order of importance:
- Overall, the anecdotal information is very positive -- demand is good, new orders are strong, and all districts are showing improvement.
- For reasons unknown, the Philadelphia region appears to be having problems right now.
- Several districts reported that capacity utilization was at or near pre-recession levels and therefore they would start to see an increase in capacity over 2011.
- The auto sector is doing well; several regions reported good results for this sector.
- New orders are up in a majority of districts
- There is a fair amount of optimism about the next six months
- Construction related concerns are still the problem child of the sector
- Price pressures are increasing, leading to some concern
