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Economy in Brief

Kansas City Fed Index Jumps
by Robert Brusca April 26, 2007

The tunnel chart on KC production says it all in a nutshell. The index has been weak. In July 2006 the production index sank below its 12-mont moving average and has more or less stayed there. It has been fluctuating sharply in early 2007 but in April it has made a sharp break higher. The production reading that has jumped to +25 for production is in the top 25 percentile of all readings for production for this index and that is a fairly strong showing. The jump is out of character with the small rises we saw in NY and in Philadelphia and weaker reading in Richmond. But as the regional Consumer Confidence readings showed us, the strength in the economy is really OUT WEST. So KC is strong and getting stronger. This is one time I hope to root for the West Coast… or at least things the other side of the Continental Divide (which the KC district bridges).

Unfortunately, one message in the chart above is that spikes in the production index tend to give way - to back off -- so while we can be encouraged by the KC reading it is only one month, after all.

The KC Fed has three different sorts of surveys. We reported at the top on the m/m survey. That is akin to most MFG surveys we see. It also has a more unusual year/year diffusion survey and a somewhat more common 6-month outlook survey. We have combined all these results into one table across the various components, provided the raw months scores as well as a second panel that expresses them as a percentile in their own respective ranges of values so they can be more directly compared. On that basis we find a number of high 60-percentiles and 70 percentiles, a few that are higher, and not many that are lower.

As to those that are lower, they are mostly good news. The recent price showing is only in about the 50Th percentile of values, a position that is neutral with respect to inflation pressures. The two inventory components show some weak readings indicating that stocks have been cut - a good thing for future production prospects. Export orders are and have been strong but prospects (oddly, given the weak dollar) are somewhat lower as a percentile reading…

As for the key readings…we find production is strong in the current month in the 77th percentile - a bit higher than its outlook, which is only in the 60th percentile. Shipments are firm in the high 70th percentile across categories. The volume of news orders is only in the mid 60th percentile as are new and past order trends – that’s only 10 percentage points above what has been average. Order backlogs are moderate, in their mid 60th percentile.

ON BALANCE… The KC survey looks much better than those from ‘out East.’ The various readings look firm to strong with most key readings above their respective mid point readings. The outlook index is quite solid. The one thing I wonder about is the weaker export readings. The world economy is supposed to be doing better. Why is the export outlook below the 50Th percentile?

Kansas City Fed Diffusion Components and their Properties
  Current Readings Percent of Own Range
Kansas City Component M/M 6-Mo Outlook Yr/Yr M/M 6-Mo Outlook Yr/Yr
FAO Indices for Kansas City 15 29 27 79.6% 71.5% 81.5%
Production 26 41 28 77.1% 60.5% 70.3%
Volume of shipments 25 42 33 78.1% 78.1% 76.7%
Volume of new orders 23 40 33 59.5% 77.5% 76.4%
Backlog of orders 10 19 16 65.9% 63.3% 65.6%
Number of employees 11 22 27 70.5% 66.7% 90.0%
Average employee workweek 3 13 14 36.7% 68.4% 67.6%
Prices received 6 33 60 50.0% 84.4% 93.1%
Prices paid for raw goods 36 54 81 51.7% 72.2% 94.7%
Capital expenditures -- 22 27 -- 68.6% 89.0%
New orders for exports 6 7 13 80.0% 40.9% 85.2%
Supplier delivery time 5 2 5 25.0% 29.2% 33.3%
Inventories: Materials 3 -15 4 68.1% 3.2% 50.8%
Inventories: Finished goods -1 -5 0 39.3% 32.0% 40.0%
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