Tuesday, March 6, 2012

The Beige Book: Manufacturing

The Beige Book is one of my favorite economic documents because it provides near real time information on the economy.  It also allows us the opportunity to look at the entire economy on a regular basis.  Last week, the Fed issued the latest BB.  As I really haven't had the opportunity to look at the whole economy in some time, this publishing is fortuitous.

From the BB:
Manufacturing has continued to increase across all twelve Federal Reserve Districts since the previous report. Most Districts reported gains in new orders, shipments, or production. Contacts reported increased capital spending in the Boston, Richmond, Chicago, Kansas City, St. Louis, Minneapolis, and Dallas Districts; contacts in Philadelphia and Cleveland also anticipate higher capital spending. Manufacturing contacts in San Francisco also continued to invest in information technology equipment. Auto-related manufacturers in the Richmond, Atlanta, St. Louis, and Minneapolis Districts reported increased activity and announced plans to expand operations and open new plants. Primary metal manufacturing showed strong growth in the Philadelphia, St. Louis, and Dallas Districts. Fabricated metal manufacturing increased in the Richmond, Kansas City, and Dallas Districts but was essentially flat in the San Francisco District. Steel producers reported that shipping volume was trending higher in the Cleveland District and specialty metal contacts reported solid order bookings in the Chicago District. In contrast to the many positive reports, contacts in some Districts reported plans to decrease operations and close plants. Contacts in chemical and paper product manufacturing in the St. Louis District reported plans to close plants and lay off workers, while manufacturers of household goods and building materials reported soft demand on average in the Chicago District. Manufacturing contacts in the Boston, Philadelphia, and Cleveland Districts expressed concern about the risks posed by the situation in Europe.

Let's look at the "big" picture:

Overall industrial production continues to move higher.  Notice the nice, continual upward trend to this statistic since the collapse in mid-2009.

I've printed the entire series of capacity utilization to short that this statistic has moved above lows from the previous  recession and continues to move higher.

The preceding charts show that on a macro-scale, manufacturing is doing well.  Let's look at some of its subparts:

Industrial production for business equipment is at or just above higher from the previous  expansion.

Durable goods manufacturing also continues its rebound from the recession.

Non-durable goods, however, area languishing.  I'm betting that a fair amount of this is due to the fact that non-durable manufacturing has moved out of the country into other areas with cheaper labor.

The above two graphs are of durable goods on a long-term and short-term time horizon.  We see that the long-term trend line is mirroring the last expansion, while the short-term trend (the lower chart) shows a continual increase as well.

The ISM overall index flirted with contraction at the end of last year, but stayed just above the 50 line.  Over the last 4 months it has moved a bit higher, but is still low by comparison to levels we saw earlier in the expansion. 

The new orders index did show contraction at the end of last year for three months.  It has since risen as well, but it is also at lower levels than we saw at the beginning of the expansion.

Finally, consider these anecdotal points from the latest ISM report:
  • "Business is holding steady. Concern over commodity prices ongoing." (Chemical Products)
  • "Still somewhat cautious about recovery. Expecting a good year, but not seeing orders yet." (Machinery)
  • "Demand remains consistent to strong on all levels." (Paper Products)
  • "Demand from auto makers is getting stronger." (Fabricated Metal Products)
  • "Manufacturing is busy. Spending money on new equipment to accommodate customer demands. Material prices are staying in check." (Food, Beverage & Tobacco Products)
  • "There seems to be a much more positive outlook for the economy. Customers are ordering material for stock rather than just working hand-to-mouth." (Fabricated Metal Products)
  • "Global GDP softening and beginning to impact the demand chain." (Computer & Electronic Products)
  • "Production is busy — several new large projects." (Primary Metals)
  • "Customers [are] lowering inventory levels, anticipating price decrease due to third-party published reports on materials." (Plastics & Metal Products)
  • "We are optimistic about the U.S. market this year, a little hesitant about what may happen in Europe and unsure about China." (Transportation Equipment)
  • "Shipments are increasing over last year. Waiting to see if the trend continues." (Wood Products)
Overall, the comments are bullish.

The conclusion from the above charts is clear: manufacturing, with the exception of non-durable manufacturing, is doing well.