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First Cut: Kansas City Fed manufacturing index for February first positive since May 2019

The Kansas City Fed’s composite manufacturing index was 5 in February after improving to -1 in January and was the first positive since 3 in May 2019. Although uneven, current conditions appear to have taken a turn for the better in the District. The six-month composite index showed expectations were for slightly faster expansion at 16 in February after 14 in January. Survey respondents’ comments indicated that some effects of the quarantine in China were being felt along the supply chain, as well as impacts from the halt in production of Boeing 737 MAX aircraft. The news was not entirely bad as layoffs elsewhere meant some skilled workers were available for hire, and lack of supply from China could be an opportunity for domestic businesses.

The volume of new orders index rose to 8 in February, the first positive since 3 in June 2019.  New export orders were up for the first time since May 2019. The export order index was 5 in February after -4 in January. The backlog of new orders continued to contract at -16 after -20 and it may be some time before backlogs start to build again. The shipments index was up to 9 in February after -4 in January and the first positive after 4 in November 2019.

The index for employment dipped to -4  in February after 4 in January, perhaps showing that manufacturers had already hired what qualified workers they could find in the prior month. The average workweek index continued to contract at -2 in February but was the highest of the negatives in the past four months.

The impacts along the supply chain with China were more evident with the supplier delivery times index rising to 11 in February after 3 in January and was at its widest since 12 in January 2019. The inventory index rose to 7 in February after seven months of contraction and was the firmest since 17 in December 2018. This is likely to reflect necessary restocking rather than unwanted inventory accumulation.

The index for prices paid declined to 14 in February after 28 in January when normal start-of-year price increases went into effect. With energy costs declining, there is little sustained upward price pressure. The prices received index of 9 in February after -3 in January may be due to needed passing on of costs related to tariffs and other trade issues.

The Kansas City-ISM equivalent index reached 53.0 in February, decisively above the 50-mark and the first time in eight months that it has signaled expansion at the national level. The Kansas City equivalent — calculated from the five components most like the ISM Manufacturing Index — has a respectable correlation with the ISM number (0.761) and seems to have been tracking well in recent months. It is probable the ISM Manufacturing Index will remain in expansion in February after the 50.9 in January and might well see a mild increase from there.


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