Factories Are Firing Up Again
There is growing evidence that the manufacturing sector is rebounding.
The Federal Reserve Bank of Richmond on Tuesday reported that its survey of regional manufacturing activity printed its first positive reading since the spring of 2022. The composite index rose from negative seven in August to positive five in September.
The Richmond Fed’s report describes this as “not very high” but finds the rebound into positive territory in September notable. In fact, the September reading is above the long-term average for the index of three. It is also above the average of two for the post-pandemic era, which we’re dating from April of 2021.
The key measures of demand turned positive for the month. The new orders index increased from -11 to positive three, the first trip into positive territory since March of 2022. The shipments index rose from -5 in August to positive seven, the first positive reading since January 2023. The capacity utilization index improved from -11 to positive six, the first positive since May of 2022.
The index tracking the number of employees of manufacturers turned positive, rising to seven from negative three. That’s the first time this gauge has turned positive, indicating growing employment, since October of 2022.
Texas Is Cooking
The Richmond Fed’s report was preceded on Monday by the Federal Reserve Bank of Dallas‘ survey that showed growth resumed in Texas manufacturing in September. The production index, a key measure of state manufacturing conditions, rebounded nearly 20 points to 7.9 — its highest reading of the year and the first positive reading since April of this year.
The Dallas Fed’s new orders index pushed up 11 points to -5.2. That’s still in negative territory, indicating demand is still slipping, but not at the pace seen in the past several months. This was the second-best reading for the gauge since it first turned negative in May 2022, just behind January of 2023’s reading of negative four.
The Texas shipments index moved up to near zero after falling to 15.8 in August. At -1.1, this is the strongest shipments reading since December of last year. The capacity utilization index returned to positive territory, climbing from -3.7 last month to 7.8 in September. That’s the first positive since April and the highest since December of 2022.
The Texas employment index surged ahead nine points to 13.6, a reading well above the series average of 7.9 and the highest since January.
Philly and New York Send Mixed Signals
The Richmond and Dallas Fed surveys are just two of the five manufacturing surveys published by Federal Reserve regional district banks. Last week, both the New York Fed and the Philly Fed released the results of their manufacturing surveys. (Neither includes a capacity utilization measure.)
The New York Fed said its new orders index “shot up” 25 points to 5.1. This was the highest reading since July 2022. The shipments index jumped 24.7 points to 12.4. Employment dipped 1.3 points to -2.7, but that is still the third best reading since January.
Philadelphia told a different story, with a number of measures that had been positive turning negative in September. The new orders index — which had been negative for 14 straight months prior to August — plunged from 16.0 last month to -10.2 this month. The shipments index fell nine points to -3.2 in September.
But Philly has been an outlier, turning in much better numbers than many of the others for nearly a year. So, its negative performance may not be indicative of a trend.
On Thursday, the Kansas City Fed will deliver its manufacturing index. The composite index was zero last month, up from -11 in July and -12 in June. The production index came in at 12, the first positive reading since March 2023 and only the second positive since September 2022. Shipments jumped 25 points to a positive reading of one from -24 in July. If improvement continues this month, that will add weight to the argument that the manufacturing sector is rebounding across the nation.
How Will the Fed React to Resurgent Manufacturing?
Of course, in this era of “good news is bad news,” the rebound of the manufacturing sector raises the question of how the Fed will react. This question deserves even more attention because of the strength in the demand indicators in the surveys. Monetary policy works mainly through demand suppression; so, anything indicating rising demand could be a red flag for the Fed.
At the very least, the September numbers suggest that the stance of monetary policy is no longer acting all that restrictively on the U.S. manufacturing sector. Yet the numbers are not so strong that they are likely to set off alarm bells.
The price components of the surveys provide mixed signals for Fed officials on inflation. The Richmond Fed survey showed that while prices paid by manufacturers for raw materials rose, the index of prices received fell. The Texas Fed’s survey indicated much the same, with rising raw materials prices but steady prices received. The Philly Fed’s survey also suggested a rise in materials inflation but steady finished products inflation. Only the New York Fed showed an increase in the prices received.
Our best guess is that this is not yet enough to move the needle on rate increases for the Fed but will likely be taken as data confirming the Fed’s message that it will need to keep rates higher for longer.
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