Tuesday, April 19, 2011

Beige Book Part II; Manufacturing

From the Federal Reserve
Boston: Business is good overall at most responding manufacturers. One firm in the chemical business reports that sales are skyrocketing and its plants are running at full capacity. Technology-related manufacturers also report that sales growth continued to be strong in 2011Q1. Revenue growth varied across different business segments at more diversified manufacturers, with some sectors such as health care-related products and transportation seeing rapid sales growth and others experiencing more moderate increases. By comparison, the climate has softened a bit for a medical-device producer as well as an electronic-systems manufacturer because of uncertainty about the federal budget; both firms have a portion of their sales tied to customers that rely on government contracts and/or grants and that seem unwilling to spend until the budget uncertainty is resolved. In addition, a manufacturer heavily tied to residential construction reports a further deterioration in its business as housing markets remain sluggish. Commodity prices continue to be a concern for a number of contacted manufacturing firms; they especially mention price increases for oil, precious metals, corn, and wheat. Some firms have already raised their selling prices in response to these input price increases and others plan to do so as the need arises. Companies who recently raised their prices comment that the increases were accepted easily by their customers. A food products manufacturer notes that there have been few objections because their customers are facing price increases from numerous suppliers. At some firms, these recent price increases do not fully compensate for their inability to raise prices in prior years. As a result, profits are flat at one firm despite its robust sales growth, and some other firms are looking for ways to cut costs further. A number of companies also note rising transportation costs for their goods due to rising diesel fuel prices. In addition, firms that use electronic components in their production are somewhat concerned about supply-chain disruptions in Japan. Inputs from Japan are expected to be in short supply soon (if they are not already) and the extent to which Japanese disruptions will impact firms' costs and/or production is uncertain. Respondent firms' sales exposure in Japan, however, is relatively limited and the revenue impact of the disaster is expected to be fairly small.

Philly: More than half of Third District manufacturers reported increases in shipments and new orders in March -- a stronger response than in February. Producers across a broad spectrum of 13 manufacturing sectors reported increased demand. The strongest reports came out of the fabricated metal products and industrial machinery and equipment sectors. Declines in orders were predominant only among producers of apparel and rubber products. While several manufacturers cited existing customers as the source of increased orders, other sources included new product offerings and expanding international opportunities.

Reports from District factories indicate that new orders and production were mainly steady or up slightly during the past six weeks. Declines were attributed to seasonal factors. Compared to a year ago, production was generally higher, with some of our contacts experiencing low double-digit increases. Manufacturers have a favorable outlook, and they expect at least modest growth during 2011. Steel producers and service centers reported that shipping volume met or exceeded expectations, with shipments being driven by energy-related, transportation, and heavy equipment industries. They anticipate volume remaining at current levels through at least the first half of this year. District auto production dipped slightly during February 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.

A majority of our contacts indicated that capacity utilization rates continue to trend higher but are somewhat below normal levels. Inventories are balanced with incoming orders. Many of the manufacturers we spoke with said that capital outlays will be higher in the upcoming months relative to year-ago levels. Some noted that projects delayed in 2010 will be started this year. Others said that business conditions warranted raising capital budgets for 2011. Prices for metal and agricultural commodities, steel, and petroleum-based products remain elevated. Many of our contacts reported passing rising input costs through to their customers. A few manufacturers commented that they expect steel prices to begin falling back during the second half of this year. The pace of hiring among manufacturers has picked up since our last report; however, several contacts said that they are using temporary workers instead of creating new positions. Wage pressures are generally contained, with some companies planning to reinstate merit increases.

Richmond: Manufacturing activity continued to expand at a solid pace in March. An auto-parts supplier said that orders at his plant had increased beyond available capacity and he indicated that lead times had increased due to the scarcity of materials. He mentioned that levels of inventories were much lower than desired, and in some cases were nonexistent, causing backlogs of orders for both aftermarket and service parts. Similarly, a packaging manufacturer told us that vendor delay in selected raw materials had affected his company, and he described transportation costs as a growing worry. A manufacturer of dental equipment reported an increase in business throughout his company; he noted that the gains included existing and new accounts. In contrast, several manufacturers who supply products to federal government agencies attributed the lack of new contracts to the uncertainties surrounding the budget for fiscal year 2011, but they expected that business would return to normal once the federal spending issues are resolved. Several textile contacts reported that uncertainty in their raw material markets, exacerbated by the turmoil in the Middle East, had caused prices in petroleum-based products to escalate. More broadly, raw materials prices continued to move higher, according to our latest survey.

Atlanta: District manufacturers noted strong growth in new orders and production. Respondents also signaled stable or higher levels of employment. The majority of manufacturing contacts continued to indicate they will be increasing production in the short-term.

Chicago: Manufacturing production continued to expand in February and March. Activity in the steel, auto, and heavy equipment sectors remained strong. Several contacts reported significant current order backlogs and firming second-quarter order books. Capacity utilization in these industries has increased, but ample idle capacity remains available. For example, a contact in the steel industry noted that active furnaces are operating at high rates of utilization while idled furnaces are expected to be brought back on-line only slowly this year given the high costs of reactivation and uncertainty in the outlook. Lead times continued to lengthen as supply chains were stretched further for some parts. In addition, concerns, and a great deal of uncertainty, were expressed about the potential impact of the Japanese disaster. Contacts expected that supply chain disruptions would take place, although it was too early to tell their full extent. Auto suppliers reported that shortages are most likely to occur first in parts such as electronics, as well as for parts that were already in short supply like tires. Some domestic suppliers have already seen increases in demand for their products as a result. Automakers reported that dealers' vehicle inventories were lean enough to make them consider adding shifts at existing plants; but if parts shortages arise, production schedules may be pared back now and made up as necessary later in the year.

St. Louis: Manufacturing activity has increased 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 silicone products, rubber products, and military vehicle manufacturing industries reported plans to expand existing operations and hire new workers. Additionally, firms in the electrical equipment and automobile parts manufacturing industries reported plans to open new plants in the District. In contrast, firms in the food, surgical instrument, packaging, and weapons manufacturing industries announced plans to decrease operations and lay off employees.

Minneapolis: Manufacturing output was up since the last report. An April survey of purchasing managers by Creighton University (Omaha, Neb.) showed increases in manufacturing activity in Minnesota, South Dakota, and North Dakota. A consulting firm recently released a survey of 400 Minnesota manufacturing companies, which indicated that 51 percent expect increased sales in 2011 compared with 2010. A tractor maker is expanding into a Minnesota facility. A circuit board producer plans to expand in South Dakota. However, in North Dakota, an electronic components plant plans to close. Surprisingly, 41 percent of manufacturing respondents to a late March ad hoc survey by the Minneapolis Fed indicated they were somewhat unfavorably impacted by the disaster in Japan. One contact noted that plastic resin shipments from Japan have been delayed.

KC: District manufacturing activity expanded rapidly and business activity for high-tech service and transportation firms improved in late February and March. Factory managers reported a surge in production and shipments at both durable and non-durable goods plants. New orders jumped in March, boosting order backlogs as firms replenished finished goods inventories. Raw material inventories rose with some reports of stockpiling to meet anticipated demand and to protect against further price increases. Expectations for future factory orders, production, and shipments remained positive. Some manufacturers were hiring workers, and others expanded the average work week. After softening in the last survey period, sales rose at high-tech service and transportation firms with further improvements expected. Transportation companies struggled to find qualified drivers, and some high-tech firms had difficulty filling specialized positions, such as software developers. With brisk demand, factories and high-tech service firms ramped up capital spending and planned additional hiring.

Dallas: Demand for construction-related products improved slightly, according to most contacts. Even after accounting for pent-up demand following bad weather in early February, cement, glass and primary metals firms and some lumber manufacturers reported some increase in activity. Apartment construction, residential repair and remodeling, and custom commercial projects were said to be driving the uptick. Fabricated metals producers said orders rose, but at a slightly slower pace. While overall activity is at low levels, most construction-related manufacturers' outlooks were more optimistic than they were six weeks ago, although there were some concerns regarding recent world events.

High-tech manufacturing firms said the fallout from the ongoing natural disaster in Japan was the major factor impacting the industry since the last report. Contacts that ship a significant share of output to Japanese factories noted their profits will be negatively impacted, particularly in the first and second quarters of this year. One respondent estimated that shipments coming from at least one factory in Japan may not return to normal until September. Other than events in Japan, most firms said that conditions were stable.

Paper manufacturers said demand had mostly recovered from the slump due to bad weather in January and February. Most firms said demand was stable or improved. Expectations are mostly for stable to improved demand over the next several months, although the longer-term outlook is more uncertain. Manufacturers of transportation equipment said demand was unchanged from the previous report. Outlooks remain cautiously optimistic, although some contacts noted concern about rising fuel costs and global uncertainties. Food manufacturers said orders rose at a moderate pace, and the outlook for sales was positive.

Eleventh District petrochemical producers said domestic demand remained strong for plastics such as polyethylene and polypropylene. Still, higher U.S. prices for some petrochemicals have made exports less attractive. The major exception is PVC which is used in construction, as ample supplies and competitive prices due to low domestic demand have kept exports solid. Refiners said activity had picked up since the last report, with stronger demand for gasoline and oil products. Refinery margins rose despite the increase in crude prices.

Frisco: Manufacturing activity in the District posted further gains during the reporting period of late February into the beginning of April. Makers of commercial aircraft and parts reported modest ongoing growth in new orders, attributed in part to increased demand from airline companies for aircraft with greater fuel efficiency. For manufacturers of semiconductors and other technology products, demand continued to grow, with high levels of capacity utilization and balanced inventories noted. Sales rose further for metal fabricators, although contacts reported minor production challenges arising from constrained supplies of raw materials. Demand remained especially weak for manufacturers of wood products, with the exception of firms in the pulp and paper segment of the industry, which saw increases in orders and output. Petroleum refiners reported slight gains in gasoline sales volumes compared with twelve months earlier, despite the demand constraints arising from higher prices and poor weather, and capacity utilization rates were up accordingly. Demand continued to grow for food manufacturers.

Notes in no order of importance:

-- Japan is a big issue -- bigger than a first glance would indicate. One contact noted the problems would not go away completely until September.

-- Overall, manufacturing is doing extremely well.

-- Several districts noted difficulty in finding skilled workers.

-- The federal government follies are also raising uncertainty.

-- Prices rises across all commodities are being felt by everybody.

-- The only industries not doing well are construction related -- although pulp is doing well because of its application in the paper industry.

At the macro level, we see the following statistics:

Industrial production is still moving higher, although it still has a long way to go before getting to pre-recession levels.

Capacity utilization is still climbing from its recession low, but also has a bit to go before it makes it to pre-recession levels.

The ISM manufacturing index is reporting some of its strongest numbers in decades, indicating manufacturing is doing very well.

Overall, manufacturing is a clear success story of the current economy.