Survey of Tenth
District Manufacturers
by
Chad R. Wilkerson
Manufacturing activity in the Tenth Federal Reserve District
continued to grow strongly in February. The year-over-year production and
new orders indexes edged higher, and the year-over-year employment index
rose solidly into positive territory for the first time in four years. In
addition, firms’ optimism about future activity improved despite
increasing concerns over rising input costs. While the month-over-month
production index edged down slightly, the monthly data are not seasonally
adjusted, so caution must be taken in basing analyses on month-to-month
comparisons. Until several years of data are available for seasonal
adjustment, this report will focus primarily on changes in activity versus
a year ago.
The net percentage of firms reporting year-over-year
increases in production rose to 27 in February, up slightly from 24 in
January but down slightly from the six-year highs posted during the fourth
quarter of 2003 (Tables 1 & 2). Year-over-year growth in production
edged higher at both durable- and nondurable-goods-producing firms, with
durable producers continuing to report very solid year-over-year gains and
nondurable producers reporting somewhat more modest gains. While sample
sizes make it more difficult to draw firm conclusions about individual
states, the data available suggest that production was above year-ago
levels in all district states but Colorado.
Like the production
index, most other year-over-year indexes of factory activity either rose
slightly in February or remained at January’s solid levels. Perhaps most
notably, the employment index jumped to 12, its highest reading since
mid-1998 and first reading above 5 since early 2000. In addition, the
shipments and new orders indexes each rose moderately. The inventory
indexes—-for both raw materials and finished goods—-rose back above zero
after dropping in January. The backlog and capital expenditures indexes
also posted modest gains, while the workweek, exports, and supplier
delivery time indexes were largely unchanged from recent months.
Price indexes for both raw materials and finished goods continued
to edge upward. The year-over-year raw materials price index increased
slightly to 50, matching a four-year high. Many firms reported continued
increases in the price of steel in particular, but also in the costs of
most energy-based products and numerous other materials. Meanwhile, the
year-over-year finished goods price index also continued to edge higher,
suggesting firms were having slightly more success raising their selling
prices. After rising to 8 in January, the finished goods price index
increased to 11 in February, the highest reading since August 2001.
Expectations for future factory activity rebounded somewhat in
February, and firms showed somewhat more confidence in their ability to
pass cost increases onto their customers. The future production index rose
back to 43 in February, after dropping to 33 in January from record highs
in the fourth quarter of 2003. The future new orders and shipments indexes
also rose slightly after falling in January, and the future capital
expenditures index increased to 23, its highest reading since early 1998.
In contrast to the rebound in optimism regarding future production and
investment, the future employment index was largely unchanged in February
and, at 13, remained lower than during several periods over the past few
years. As for prices, firms continue to expect rising materials prices and
a greater ability to pass cost increases through to customers. The future
raw materials price index rose from 42 to 48, as firms anticipate further
increases in the price of steel and other materials. Meanwhile, the future
finished goods price index rose by a larger amount, from 15 in January to
25 in February, matching its highest reading since 1995 and suggesting
that firms expect some pricing power to return in coming months.
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