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First Cut: Kansas City Fed Manufacturing Index little changed in January from December

The Kansas City Fed’s Manufacturing Index was little changed in January at 5 from 6 in December. The report included annual revisions. Expansion continues at a modest pace although survey respondents presented a mixed picture at the start of the year. There were some indications that the government shutdown was starting to be felt in orders and production, but these were mostly tentative. If the shutdown drags on it will be a bigger part of the picture next month. In the mean time, production is being hampered by a lack of skilled labor and businesses are being forced to raise wages to attract entry-level workers. Tariffs are also lingering as an issue in terms of reducing orders, increasing costs, difficulties along the supply chain, and generally adding uncertainty to the economic outlook.

The index is similar to the ISM Manufacturing Index in that it is calculated as an average of the subindexes for production, new orders, employment, supplier delivery times, and raw materials inventories. While production was up (6 in January versus 3 in December) it is well below the readings seen over almost all of the past year. New orders were barely expanding (1 versus 7) and also slower than most of 2018. Delivery times widened but seem less affected by commodities shortages than earlier in 2018 (14 versus 7). Inventories appear to be adjusting quickly to slower activity (4 versus 19 in December). Employment was somewhat softer (7 versus 10) but continues at a modest pace.

Prices paid declined (23 in January from 34 in December) along with decreases in energy commodities. However, pricing power was up and in line with most of 2018 (23 versus 8) as higher costs continued to be passed through.

Compared to the mixed readings in the other District Bank surveys of manufacturing, the Kansas City measure is steadier, if at a more tempered pace than in the prior year.

The Kansas City equivalent to the ISM Manufacturing Survey is consistent with the broad tone of the other surveys available. It pointed to a mild decline at 53.2 in January from 53.9 in December, not dissimilar to the calculation for the Richmond Fed (unchanged at 50.7) and Philadelphia (54.8 after 55.3). Philadelphia and Richmond have the best correlation to the ISM index (0.838 and 0.859, respectively), but the Kansas City equivalent is fairly solid (0.763). The data suggest a flat-to-slightly down reading for the ISM Manufacturing Index when it is released on Friday, February 1 at 10:00 ET.



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