Manufacturing activity in the US Midwest region unexpectedly fell deeper into contraction this month, as reported by the Federal Reserve Bank of Kansas City. The composite manufacturing index dropped to minus 13 in July, a significant downturn from minus 8 in June, deviating sharply from market expectations which anticipated a less severe minus 5 in a Bloomberg survey.
This downturn was primarily influenced by a significant drop in durable goods manufacturing, particularly sectors such as transportation equipment, fabricated metals, and machinery. Chad Wilkerson, Senior Vice President at the Kansas City Fed, remarked, "Our regional factory index was at its lowest level in four years in July.
The volume of shipments and new orders fell substantially, while production and employment levels decreased at a moderate pace." The data shows that shipments plummeted to minus 18 from a neutral minus 1 the previous month, and the new orders gauge slid to minus 21 from minus 13. Both the production and employment indexes saw a slight dip of one point, landing at minus 12. Interestingly, the index monitoring raw material prices experienced an uptick, rising to 17 in July from 9 in June.
Meanwhile, selling prices saw a slight cooling, dropping to zero from 3 month-over-month. The Kansas City Fed highlighted that while price growth for raw materials surged this month, the modest cooling of finished product prices is further squeezing profit margins for many manufacturers. Looking ahead, the composite index, which is seasonally adjusted, indicated a reduction of two points to 5 for the next six months, with the future production index also decreasing to 13 from 18.
However, there was a positive note as shipments gained two points to reach 14, while new orders remained steady at 8. Wilkerson noted, "A majority of firms expect to maintain or increase current levels in the next six months." Additionally, firms anticipate a slight easing in input prices over the next six months, with expectations of selling prices gradually inching upwards.
Nevertheless, the forward-looking employment metric dipped four points to 13, as reflected in the Fed branch's data. This indicates a cautious outlook among manufacturers amid fluctuating economic conditions and rising costs..