Manufacturing activity in central U.S. slowed in May compared with the previous month, data from a survey by the Federal Reserve Bank of Kansas City showed Thursday.
The Tenth District manufacturing survey’s composite index fell to 23 in May from 25 in April, continuing the slowdown that saw the index drop 12 points in the prior month.
The results fell short of expectations. Economists surveyed by Econoday had forecast the index would bounce back to 32, closing in on the February level of 37.
The decline was not as sharp as those reported over the past 10 days by the regional Fed banks in New York, Philadelphia, and Richmond. Both the New York and Richmond indexes were negative for the month, indicating a contraction. The Philly Fed index plunged to 2.6 from 17.6 a month earlier, barely hanging on to positive territory. All those declines were worse than expected, indicating that economists had underestimated the slowdown that hit the manufacturing sector in May.
The gauge of production continued to fall, dropping to 19 from 28 in April and 46 in March. Shipments also declined for the second consecutive month. Inventories of raw materials and finished goods were also down sharply for the second month in a row.
The six-month out expectations of manufacturers for production, shipments, and inventories of finished goods all fell for a second consecutive month. The outlook for inventories of raw materials declined after rising in April.
The inflation measures eased somewhat but remain at historically high levels. Forty-eight percent of manufacturers say prices received for their products rose compared with a month ago, and the same share said prices were unchanged. Just four percent reported lowering prices. Ninety-one percent reported charging more than a year ago. Seventy-seven percent said they paid more for raw materials, 18 percent reported no change in materials costs, and 6 percent said they paid less. Ninety-seven percent report paying more than a year ago.
The outlook for prices of raw materials and finished goods prices remained high but were down from recent historical highs.
This month the Kansas City Fed asked what it calls “special questions” on rising materials prices, supply chain disruptions/shortages, and wage and price expectations. Ninety-two percent of manufacturers reported that their business had been affected by rising materials prices, shortages, and longer delivery times. Eighty-seven percent say these disruptions will last for at least 6 months or longer. More than 59 percent of firms say they expected wages and prices to rise faster than they did last year, suggesting that inflation expectations are becoming dislodged from previous levels and companies now expect inflation to continue to accelerate.
Labor market conditions appeared to tighten further. The metric of the number of employees rose to its highest level in a year and the gauge of hours worked ticked up. Expectations for payrolls and hours remained similar to the prior month.
The comments from manufacturers highlight the strain supply chain disruptions, labor market tightness, and inflation are putting on companies.
- “We continue to struggle hiring people. In some cases, we have raised wages 20% in the past few years. This
trend is very troubling.” - “Continue to see tight labor market. Need to attract employees from other companies.”
- “It’s a struggle to keep up with increased costs of materials and finding new ways to attract workers. The current
labor pool is dismal at best. 50% fail to show up for the interview and another 30% fail the drug test.” - “Most challenging time in my 29 years in our business – energy costs, labor shortages, raw material price increases and raw material supply disruptions are an ongoing and endless source of problems to manage and trying to carry more inventory is tying up our cash. We see no indication of improvement for any of these issues at least through the next 6 months. Like everyone else we are trying to pass on price increases, but it is hard to keeping up with cost increases.”
- “There is a very troubling loop of high inflation causing significant issues for people commuting to work. This is driving higher wages and once again, companies are forced to raise prices. At some point, the US will become uncompetitive globally and could slow demand.”
- “Our non-raw material (steel) costs continue to increase. Production supplies and repair parts are increasing in price and increasingly difficult to obtain. It is causing us to increase our investment in such non-production inventories to compensate for lead-time and availability.”
- “Supply chain problems and raw material price increases will continue for the next year fueling price increases on our finished products.”
- “Not only is inflation hitting us on the raw materials, freight, and product pricing areas, we are seeing notable softness in the market which we believe is due to the general public shifting to austerity mode. Only buying what is essential and not eating out as much.”
There was some good news in the report. The growth in supplier delivery time slowed, suggesting some supply chain improvement, although the backlog of orders rose. New orders rose at a faster pace, as did export orders.
Manufacturers said they expect increases in order backlog, new orders for export, and supplier delivery times six months from now.
The measure of capital spending was up from a year ago but the forecast for capital spending inched down.
“The pace of regional factory growth slowed slightly but remained strong,” said Kansas City Fed economist Chad Wilkerson. “Firms continued to report negative impacts from higher inflation and supply shortages. Nearly 70% of all firms reported worse supply disruptions and shortages compared with 2021, with most expecting conditions to last another six months or longer.”
The survey covers manufacturers in the western third of Missouri, all of Kansas, Colorado, Nebraska, Oklahoma and Wyoming, and the northern half of New Mexico.