Kansas City Fed: Manufacturing Growth is Sluggish

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The Kansas City Fed’s survey of manufacturers suggests a sluggish pace for growth in May.

The survey’s composite index notched downward after a steeper drop last month. Economists had expected a slight movement downward but the slip was well within the consensus range.

The Kansas City Fed’s survey is not a good indicator of national manufacturing activity. It reflects a survey of manufacturing plants in Colorado, Kansas, Nebraska, Oklahoma, Wyoming, northern New Mexico, and western Missouri. The sample is quite small and this time included only 81 responses.

Last week, the New York Fed and the Philadelphia Fed released their surveys of manufacturers. In contrast with Kansas City, those showed stronger than expected strength.

Whatever its limitations, the report is considered a decent indicator for regional activity. Its employment component is a particularly reliable predictor of current and manufacturing employment in the region.

The employment component rose in the latest survey, a rebound from April’s sharp decline. Production, shipments, and new orders declined.

There was little sign of inflation in the survey. Half of the respondents said there was no changes in prices paid for raw materials, while 33 percent said prices were up. Just 23 percent said they were getting higher prices for their finished product but 70 percent said prices were unchanged. Fifty-eight percent said they expect to pay higher prices six-months from now and forty-one said they prices for their products would increase.

The price responses highlight a few things about the effects of tariffs on business. The fact that more manufacturers in the region say materials prices are rising than say product prices are rising suggests that the costs of tariffs are not getting fully passed on to consumers. In the year-on-year comparison, 72 percent said materials were up and 62 percent said product prices were up–the same 10 point gap seen in the current months numbers. The expectations show the same: prices paid rising more than prices received.

The Kansas City survey was open for a five-day period from May 15-20, 2019. That means it was taken after Trump raised tariffs on $200 billion of goods from 10 percent to 25 percent. The Philadelphia and New York surveys spanned the period before and after the tariff hike.

The report includes some complaints about the tariffs.

“Regional factory growth was sluggish again in May,” said Chad Wilkerson, vice president and economist Kansas City Fed. “Several firms noted that new tariffs were disrupting activity.”

“April was a down month but May will be worse. Tariffs will force us to reduce our workforce and increase costs to the consumer,” one firm said.
Other firms, however, complained they were losing employees. “Labor is still our biggest challenge. With the warm weather we have lost employees due to construction jobs and we are having a very difficult time finding replacements,” one said.

And some of the “disruption” reported are signs that the tariffs are accomplishing the Trump administration’s policy goals. “The 25 percent tariffs from China will hurt profitability in the short term. We are shifting some supplier volume from China to other global sources to reduce the China tariff impact where it makes sense,” one firm said.


There are some possible political implications. Continued sluggishness in manufacturing in Colorado and New Mexico could hamper the Trump 2020 campaign’s efforts to win those two states, which supported Hillary Clinton in 2016 but by margins that were smaller than the share received by the libertarian party candidates.

The economy in both states, however, has improved since the election of 2016. New Mexico’s unemployment rate has fallen from 6.3 percent in November of 2016 to 4.3 percent in April, far better than the improvement seen nationwide. Colorado’s unemployment rate has risen over the last two years from 2.9 pre-election to 3.4 in April. But that has largely been due to a surge in both the size of its labor force, which has grown 6.7 percent during Trump’s presidency, and a climbing labor force participation in the state, which has gone from 67.2 percent to 69.1 percent.



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