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First Cut: Kansas City Fed’s Manufacturing Index improves slightly in September, but still negative

The Kansas City Fed’s Manufacturing Index rose to -2 in September from -6 in August and hasn’t seen a positive reading since May. The index for six months from now fell to 5 in September from 11 in August and reached its lowest since 5 in May 2016. There appears to be little prospect of a rebound from present sluggish conditions. Comments from survey respondents broadly suggested that activity remained bedeviled by a lack of skilled labor and the fallout from uncertain trade policy.

The details of the report were uneven, but on net indicated that a few points of modest improvement still leave overall conditions soft compared to the prior month.

The index for new orders improved (-3 in September after -16 in August) but remained in contraction for a third month in a row. Order backlogs continued to contract at the same steep pace as the prior month (-19) and are leaving less to fall back on while new orders are slow.

The index for employment was negative and on the downside for a third month (-13 in September after -7 in the prior month) and reached its lowest since  -13 in March 2016. The average workweek index rose (10 after 7) as businesses relied more on existing workers for production.

The index for supplier deliveries edged up (1 in September after -6 in August) and is showing signs of seesawing above and below neutral that indicates the underlying trend for deliveries is neither too fast nor too slow. Finished goods inventories contracted, declining at a faster pace over the past three months (-9 after -6).

Prices paid fell for a second month (-6 in September after -2 in August) probably due to lower energy costs as well as for some other commodities. Prices received remained little changed, ekeing out only a narrow increase (1 after -3).

The Kansas City-ISM equivalent index was up in September from August, but remained below the 50-mark for a third month at 48.7. The calculation from the five components in the Kansas City survey that most closely match those in the ISM Manufacturing Index do not result in the strongest correlation among the five District Bank surveys of the factory sector. However, it is enough to suggest that the national report may not be able to climb back into expansionary territory when it is released at 10:00 ET on Tuesday, October 1.

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