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Kansas City Fed Confirms Economic Weakness

The Federal Reserve Bank of Kansas City released its regional August Manufacturing Survey on Thursday. This is far from a market-moving event, but it does show regional economic weakness on a semi-real-time basis. The report said manufacturing activity continued to decline moderately in the Fed’s 10th district.

Prior weakness was seen in Richmond data and after a truly dismal Empire Manufacturing reading for August. Philadelphia and Chicago readings were more positive.

The drop in the KC-Fed data was said to be similar to the pace of the previous few months. Those who responded to the survey noted that weak oil and gas activity was hurting, along with a stronger U.S. dollar. That being said, the price indexes also fell, after rising in recent months.

As a reminder, the Federal Reserve is looking for and hoping for any signs of higher prices now or ahead. They just are not finding it, and, along with the recent turmoil, it makes raising rates that much more complicated and that much more difficult to justify.

The month-over-month composite index was -9 in August, down from -7 in July. It was equal to a -9 reading in June. Readings above 0 signal growth and those below 0 signal contraction. The composite index is an average of the production, new orders, employment, supplier delivery time and raw materials inventory indexes.

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Investors generally ignore this regional report. Also, economists and Fed watchers might want to consider that the August survey included only 106 responses from Fed district plants in the states and areas of Colorado, Kansas, Nebraska, Oklahoma, Wyoming, northern New Mexico and western Missouri. Additional data was broken out as follows:

  • The production index dropped from -5 to -16, and the new orders, shipments and order backlog indexes also declined moderately.
  • The new orders index edged higher from -10 to -4, and the employment index rebounded slightly after falling considerably last month.
  • The raw materials inventory index fell from -7 to -12, and the finished goods inventory index also decreased.

The Fed report said:

The decrease was mostly attributable to weaker nondurable goods manufacturing, led by a reduction in food, beverage, and plastics production. Durable goods production remained weak but stable, particularly for metals and machinery products. Production indexes fell in nearly all District states. The majority of other month-over-month indexes edged lower.

By Jon C. Ogg