Why employment and new orders touch highs in Kansas Fed’s survey
Tenth District Manufacturing Survey: Production, selling prices, and new orders gain traction
The Federal Reserve Bank of Kansas City announced the results of May’s manufacturing survey on Thursday, May 22. The headline survey reading increased to ten, up from seven in April, and matched the reading in March. A reading above zero indicates manufacturing expansion, while a reading below zero indicates contraction. Three of the key index components including production, employment, and shipments reached their highest levels in more than a year.
“This was the third straight month of solid growth at factories in the region, following some weather-related weakness in previous months,” said Chad Wilkerson, vice president and economist at the Federal Reserve Bank of Kansas City. “More factories than in recent surveys were also able to raise selling prices.”
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What is the Tenth District Manufacturing survey?
Unlike the Chicago Fed National Activity Index, which covers the whole country, the Kansas City Fed’s monthly Survey of Tenth District Manufacturers provides information on current manufacturing activity in the Tenth Federal Reserve District, which includes the western third of Missouri; all of Kansas, Colorado, Nebraska, Oklahoma, and Wyoming; and the northern half of New Mexico. The survey monitors factories selected according to geographic distribution, industry mix, and size. Survey results are indicative of changes in manufacturing activity, including production and shipments, and monitor both changes in prices of raw materials and finished products.
Highlights from May’s report
- The survey’s composite index consisting of sub-indices (production, new orders, employment, supplier delivery times, and raw materials inventory) increased to ten in May from seven in April.
- Labor market components grew for the second straight month, with both the employment and average work week indices showing upward trends.
- Most of the index components in the future factory index, edged downwards, although they still exhibited signs of healthy growth.
- Durable goods production showed growth, led by machinery and construction materials, while factories reported almost no change in non-durable goods production.
- One of the negatives in the report, was the export orders index—firms reported a decline in export orders. One of the comments made by a manufacturer read as follows: “Export business is down 14% year-to-date without the loss of accounts. Smaller orders are being placed with lower inventory on hand.”
Inflation increases for the second month in a row
Inflationary factors were evident for the second consecutive month—factories reported higher prices, both for raw materials and sale of finished goods. The prices received for the finished goods index increased to its highest level since July 2011. The index represents the selling price that manufacturers have received for their products. This would be good news for policy makers because inflation has consistently trailed its long-run inflation target of 2% over the past two years.
What do manufacturing surveys mean for investors?
Manufacturing activity usually starts gathering pace as the economy is expanding. Cyclical stocks generally tend to perform well in this economic environment. One way for investors to benefit from an uptick in manufacturing activity is by investing in ETFs like the iShares U.S. Industrials ETF (IYJ). Top ten holdings in IYJ include General Electric (GE) and United Technologies (UTX).
However, increases in manufacturing activity and economic growth are usually accompanied by an increase in interest rates. As bond prices move inversely to interest rates, this would affect prices of fixed income ETFs like the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Barclays Capital High Yield Bond ETF (JNK).
In the next two sections of this series, we will cover two major housing market reports released last week and what they mean for investors. Please read on.