Why manufacturing activity impacts consumer spending habits

Kansas City Fed’s Tenth District Manufacturing survey report

The Kansas City Fed’s Tenth District Manufacturing survey is scheduled to be released on Thursday, June 26. This monthly survey provides information on current manufacturing activity in the Tenth Federal Reserve District, which includes the western third of Missouri, the northern half of New Mexico, and all of Kansas, Colorado, Nebraska, Oklahoma, and Wyoming.

Why manufacturing activity impacts consumer spending habits

Highlights from the May manufacturing survey

The headline index reading came in at ten—an increase of three from April’s figure. A reading above zero indicates manufacturing expansion, while a reading below zero indicates contraction. Production, employment, and shipments (some of the most important sub-indices) reached their highest levels in over a year. These three components bode well for future growth in the manufacturing sector in the Tenth District.

Investor impact

An uptick in manufacturing activity is beneficial for industrial stocks. Investors can gain exposure to this sector by investing in ETFs like the Industrial Select Sector SPDR ETF (XLI) and the Vanguard Industrials ETF (VIS). Top ten holdings in both the ETFs consist of blue-chip stocks like General Electric (GE) and United Technologies. Both stocks are also part of the S&P 100 Index (OEF).

Inflationary impact

Inflationary trends were also apparent in the May report. Prices received by manufacturers were higher. Prices paid for raw materials were also high. This is a reflection of broader trends nationwide—both the Consumer Price Index (or CPI) and the Increase in Personal Consumption Expenditure (or PCE) have shown signs of increase. The headline CPI for May came in at 2%, while the PCE for April was estimated at 1.6%. Higher inflation at the consumer level would also be a factor hindering increases in the consumption component of gross domestic product (or GDP), unless wages keep up with inflation.

An increase in inflation would increase nominal yields on bonds (BND), all else equal. As bond prices and yields move in opposite directions, this would lower bond prices.

To lean about recent trends in the corporate bond market and how they may impact your investments, please read the Market Realist series, Must-know: Why the jury is still out on the rate hike?