Manufacturing activity was reported as continuing to increase since the last report in all but two districts, although many noted that the pace of growth had slowed. The Boston, Atlanta, St. Louis, Minneapolis, and San Francisco, Districts reported that activity expanded, and the Dallas District reported a pickup in demand; the Philadelphia, Richmond, Chicago, and Kansas City Districts reported that activity expanded but at a slower pace, while activity was reported as steady in the New York District and stable to growing in the Cleveland District. Supply disruptions related to the earthquake in Japan led to reduced production of automobiles and auto parts in several Districts. The Cleveland District noted a sharp drop in auto production, the Atlanta and St. Louis Districts also saw production fall, and auto deliveries were reported as having declined in the Richmond District. The Atlanta District said lost production in its region would be made up later in the year. Contacts in the Chicago District said that contingency plans to deal with supply disruptions were helpful in mitigating the effects. High-tech firms in the Boston and Dallas Districts reported that shortages of parts, due to disruptions in Japan, had adverse effects on business; in contrast, there were few supply constraints that affected technology-related products in the San Francisco District.
Growth was reported as strong for semiconductors in the San Francisco and Boston Districts. The Cleveland District reported that steel producers were seeing shipping volumes level off after a strong first quarter performance, and the Chicago District noted a decline in second quarter orders for industrial metals, although orders for the third quarter were coming in at a more positive pace. A contact in the Richmond District said that demand for industrial metals had leveled off. The Chicago District reported a decline in activity for construction materials and household goods. Production remained strong for makers of commercial aircraft and parts in the San Francisco District.
Looking forward, contacts in most districts were generally optimistic about the outlook, although less so than the last report. The Cleveland District said that the majority of manufacturing contacts maintained a favorable outlook, although some are delaying the start of capital projects. Contacts were generally cautiously optimistic in the Boston District, although some expect sales growth to moderate. Contacts were mostly positive about the outlook in the Philadelphia District, though the level of optimism was not quite as strong as in the last report. Chicago District contacts expect conditions to rebound in the coming months. A majority of contacts in the Atlanta District planned to increase production.
At the highest level, all but two districts reported growth, although at a lower pace. The national summation indicates the Japanese earthquake was a problem across a variety of districts and for a variety of reasons. These disruptions hurt several industries -- not just automobile production. Steel and industrial metals saw a drop-off, although aircraft manufacturing (read: Boeing) reported growth.
Let's look at the individual districts.
Boston: Business conditions continue to be good at surveyed manufacturers. A parts manufacturer for autos and other vehicles reports that it is struggling to keep up with increased demand. A firm in the semiconductor industry also cites very strong sales growth in the first quarter of this year continuing into the second quarter. Reports from local pharmaceutical manufacturers are also favorable, especially compared with the end of last year, and a company in the medical devices business notes improving sales of its traditional product line after a lengthy period of very sluggish growth. Overall, contacted manufacturers are cautiously optimistic that growth will continue at a reasonable pace for the rest of the second quarter and into the second half of the year. Some firms, however, expect sales growth to moderate somewhat, in part because the second half of 2010 was strong for many respondents.
Commodity prices continue to be a concern for manufacturers whose production inputs include petroleum or gas-related products and/or firms that use a lot of metals such as steel. Most of the affected companies have already raised prices with little push-back from their customers, and a number of them plan to implement further price hikes this summer. By contrast, a pharmaceutical company with overseas sales notes downward pressure on their selling prices to government health care systems in Europe, which they attribute to ongoing fiscal imbalances across the Euro-area and related interventions to reduce costs and government debt. Some firms still report modest supply chain disruptions because of the earthquake in Japan (mostly semiconductor-related and other high tech inputs) or worldwide demand-related shortages of selected petroleum-related products. However, one affected firm notes that supply conditions have improved slightly recently and others say they continue to make adjustments to avoid a big impact on their production or sales.
Philly: Reports of widespread, robust demand growth for manufactured products as of the last Beige Book gave way to two months of easing in the breadth and pace of recovery. Less than 30 percent of Third District manufacturers reported increases in shipments and orders in May -- slipping from over 50 percent since the last Beige Book. Among key manufacturing sectors in the Third District, the number reporting increases of both shipments and orders narrowed to 7 from 13 since the last Beige Book. The strongest reports of orders came from producers of chemicals; food; stone, clay, and glass; and fabricated metal products. Since the last Beige Book, declines in orders broadened from producers of apparel and rubber products to include producers of electronic equipment and instruments. Failure to pass a multiyear transportation infrastructure reauthorization bill and the ongoing real estate slump were cited by five different manufacturing sectors as hampering the recovery.
Third District manufacturers remain mostly positive about business conditions over the next six months; however, the percent of firms expecting increases fell off sharply since the last Beige Book, from 66 percent to 36 percent. Among the firms contacted in May, about 38 percent expect increases in new orders and shipments, while about 20 percent expect decreases. A little uncertainty has crept back into manufacturers' expectations, with several contacts citing "swings" in activity. Capital spending plans over a six-month planning horizon have changed little since the last Beige Book, with about one-third of firms projecting increases.
Cleveland: Reports from District factories indicate that production was stable or slightly up during the past six weeks, with a moderate rise in backlogs. A majority of our contacts maintain a favorable outlook, some of which was attributed to strength in offshore markets. However, several manufacturers said that market conditions are beginning to soften. Many steel producers and service centers reported that the rise in shipping volume seen in the first quarter is beginning to taper off, due in part to pricing issues and declines in consumer demand. Shipments are being driven by capital goods, autos, and energy-related industries. They anticipate volume remaining at current levels until a seasonal slowdown, which typically occurs during the third quarter. District auto production dropped sharply during April on a month-over-month and year-over-year basis. Most of the decline was due to supply disruptions caused by events in Japan.
Manufacturers remain committed to raising capital outlays in the upcoming months relative to year-ago levels. Nonetheless, about a third of our contacts reported that they are delaying the start of some projects. Capacity utilization rates are below what is considered normal for a majority of manufacturers. Prices for metal and agricultural commodities, steel, and petroleum-based products remain elevated. Most of our contacts reported passing through some of these higher input prices to their customers. A few producers commented that steel and scrap prices have peaked and are expected to begin falling back. Manufacturers continued hiring at a modest pace, with most new hires being higher-skilled workers. Several contacts also noted a slight increase in wage pressures.
Richmond: District manufacturing cooled in May after expanding for seven months. Several textile and apparel contacts described their business as being unpredictable, with "very little depth." Similarly, a producer of coated steels mentioned that, although the first quarter had been fairly strong, order volume had been going down since then. Also, a supplier of specialty materials reported that his business had leveled off in recent weeks because demand for his customers' goods had slowed. Several contacts stated that the disruptions in Japan had affected automotive deliveries, due to lack of electronic components and paints. Firms reported that their customers were strongly resisting any price increases, despite knowing that commodity prices were rising. Our latest manufacturing survey revealed that prices of raw materials rose notably over the last month, but prices of finished goods were up only moderately.
Atlanta: District manufacturers noted an increase in new orders and production in April and May. The majority of contacts planned to increase production in the short-term. The exceptions were auto producers and parts suppliers that experienced input constraints stemming from the Japanese earthquake. However, these contacts reported that lost production would be made up later in the year as supply channels returned to normal. District ports reported increased volumes in cargo and shipments. Air cargo contacts noted that tonnage was returning to near pre-recession levels. Railway firms cited strong increases in exports of chemicals, coal, and other energy-related products to China and India. The flooding of the Mississippi River is not expected to cause long-term disruptions to maritime traffic.
Chicago: Manufacturing production growth slowed from the previous reporting period, although contacts expected the recent slowdown would be temporary with conditions expected to rebound in the coming months. Capacity utilization in the steel industry was only marginally lower; and while other manufacturers of industrial metals noted a softening in orders for second quarter delivery, several also indicated that order books for third quarter delivery were more positive. A contact speculated that the recent volatility in industrial metals prices was leading some customers to delay orders, expecting lower surcharges in the coming months and to avoid getting caught holding inventory at elevated prices. Manufacturers of construction materials and household goods also reported a decline in activity. In contrast, orders for heavy trucks, agricultural and construction equipment were up. Fleet replacement and robust activity in oil and gas extraction were cited as reasons for the continued strength in demand for heavy equipment. Supply chain disruptions reduced activity in the automotive sector, but mostly for the Japanese automakers and their suppliers. District automakers were able to avoid the most severe dislocations by reallocating parts to vehicles that are in high demand and implementing contingency plans for alternative supply sources. Contacts indicated that while it remains to be seen how effective these measures will be over an extended period, these supply chain adjustments were occurring at a faster rate than previously expected. In addition, a contact noted that some automakers and their suppliers are moving planned summer shutdowns forward into June to give supply chains time to repair and thus be in better position for a ramp up in production in the third quarter.
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 tire, powder coating, food, paper, packaging, machinery, automobile, and ship manufacturing industries reported plans to expand existing operations and hire new workers. In contrast, a firm in paper manufacturing announced plans to close a plant and lay off employees. Additionally, some automobile manufacturers have reduced their production because of a shortage of parts sourced from Japan.
Minneapolis: Manufacturing activity increased since the last report. A May survey of purchasing managers by Creighton University (Omaha, Neb.) showed increases in manufacturing activity in Minnesota, South Dakota and North Dakota. A Sioux Falls manufacturer of electronics and aerospace products is expanding its operations. A bank director reported that manufacturers saw higher productivity and increased their equipment purchases.KC: Growth in District manufacturing activity slowed following rapid growth in recent months, while other business activity expanded further. Factory orders declined after surging earlier in the spring, but factory hiring continued at solid rates and firms remained relatively optimistic about future sales. Growth in transportation activity accelerated from the previous survey, and most firms reported optimism about future sales. The majority of high-tech services firms reported strong growth in sales, though the pace slowed a bit from the previous month. Capital spending plans improved for transportation companies, and high-tech and manufacturing firms also reported fairly solid plans for future expenditures.
Dallas: Most construction-related manufacturers noted a pick-up in demand since the last report. Some of the uptick was seasonal and expected, but several contacts said that it was difficult to separate out seasonal demand from improved business conditions. Public projects still account for a large share of orders, but contacts said demand had increased because of an acceleration in private projects such as apartment and commercial buildings. The one exception was the lumber industry, where responses mostly reflected weaker conditions over the past six weeks.
Respondents in high-tech manufacturing said sales and orders remain strong overall, but demand was mixed. One source of weakening demand was the ripple effects of the natural disaster in northern Japan as shortages of parts fed into slowdowns in demand for complementary parts. Several respondents noted a broad pickup in consumer demand from India and China and, within the US, an increase in demand for products such as 3-D televisions, tablets and smart phones. Contacts also reported an increase in orders for semiconductors due to a pickup in demand from the industrial, medical and auto sectors.
Reports from most paper manufacturers reflected stable to improved orders stemming from broad-based economic strengthening. Transportation manufacturing firms said orders were strong and several said demand had risen slightly since the last report. Respondents in the food industry said sales continued to increase at a steady pace over the past six weeks and outlooks remained positive.
Petrochemical firms said supplies were very tight, in part due to restricted capacity caused by unplanned domestic plant outages, as well as reduced production in or near the Japanese earthquake zone. Demand remains strong for most products, and prices are rising. High profits and strong margins for ethylene producers have led to announcements of several new plants and expansions in the Gulf Coast and elsewhere. Refiners reported extremely strong profit margins, and said domestic gasoline inventories were near the bottom of the normal range.
SF: District manufacturing activity posted further net gains during the reporting period of late April through the end of May. Manufacturers of semiconductors and other technology products reported continued growth in new orders and sales as well as high levels of capacity utilization, with few supply constraints arising from the crisis in Japan. Activity fell slightly for metal fabricators, as demand growth eased in the wake of strong gains in preceding months. Production rates remained solid for makers of commercial aircraft and parts, with modest growth in new orders adding to an existing order backlog. Capacity utilization rates dropped a bit for petroleum refiners, as domestic demand for gasoline stalled in response to elevated prices. Reports from food and beverage manufacturers indicated that demand for their products was largely stable or up somewhat.
Some notes, in no particular order of importance
-- What is missing from all of the above summations is any indication that manufacturing is in trouble. While several districts noted a slowdown (Richmond, Philly, Chicago, KC) there was no indication that market participants thought these declines were widespread. Additionally, several districts attributed the slowdown to Japan.
-- High-tech manufacturing is doing very well.
-- Steel production seems to be leveling off.
-- There is still confidence in the future, adding further credence to the argument that the recent slowdown is temporary.