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Economy in Brief

Kansas City Fed's Factory Sector Index Rises to Just Below Record
by Sandy Batten  July 22, 2021

• Overall growth picked up in July to just below April record pace.

• 91% of firms reported workers in short supply with 78% having to raise wages to attract or keep workers.

• Expectations for six months ahead slip slightly from record.

The Federal Reserve Bank of Kansas City reported that its manufacturing sector business activity index increased to 30 in July from 27 in June and just one tick shy of the record 31 posted in April. The headline index (an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes) and its components compare activity with a month ago. The series dates back to July 2001. The index comparing activity to a year ago rose to 50 in July, a series record high, from 43 in June.

The July survey was open for a five-day period from July 14-19, 2021 and included 89 responses from plants in Colorado, Kansas, Nebraska, Oklahoma, Wyoming, northern New Mexico, and western Missouri.

The ISM-Adjusted Index (NSA) edged up to 64.3 in July from 64.2 in June. The series record for this measure was 66.7 in April. This index remains well above the critical 50 level which separates expansion from contraction.

The new orders index rebounded to 26 in July after having fallen to 22 in June. The shipments index fell soared to 37 in July, its second highest reading on record, from 20 in June. The order backlog measure exploded up to a record 53 in July, 18 points higher than the previous record, from 29 in June. Supplier delivery times remain elevated, edging up to 39 in July from 38 in June, indicating still very slow delivery speeds. The production index jumped up 11 points to a new record high of 41 in July.

The employment measure edged up to 27 in July from 26 in June and just short of the record reading of 29 in April. Employment issues figured prominently in the special questions. 91% of firms reported that workers were in short supply, more than any time previously in the survey history. Wage pressures also surpassed survey records as 78% of firms reported having to raise wages more than normal to attract or keep workers. To attract new talent, 72% of manufacturers reported raising compensation, 60% reported hiring less qualified workers with more on the job training, and another 60% increased advertising for open positions. As labor shortages have persisted, 75% of firms have increased overtime to compensate.

On the inflation front, the prices received index for finished products rose to a new record 52 in July from 48 in June. This stood in sharp contrast to the indications of falling prices observed a year ago. The raw materials index eased to 78, its second consecutive monthly decline, after reaching a record of 86 in May. This compares with a recent low of -16 in April 2020.

The outlook remains optimistic but slightly less ebullient than in June. The expectations-in-six months composite reading eased to 33 in July from a record 37 in June. Expectations for employment increased while those for orders, shipments, inventories and delivery times fell.

Firms generally expect inflation pressures to endure over the coming six months. The expectations index for prices received rose to a new record of 64 in July, and expectations for raw materials prices also increased to 71 in July from 68 in June.

The series dates back to July 2001. The diffusion indexes are calculated as the percentage of total respondents reporting increases minus the percentage reporting declines. Data for the Kansas City Fed Survey can be found in Haver's SURVEYS database.

Kansas City Federal Reserve Manufacturing Survey (SA) Jul Jun May Jul'20 2020 2019 2018
Conditions Versus One Month Ago (% Balance)     30 27 26 3 0 0 17
ISM-Adjusted Composite Index (NSA) 64.3 64.2 64.5 51.5 50.1 50.0 58.9
   New Orders Volume 26 22 35 9 1 -3 17
   Number of  Employees 27 26 20 3 -4 -1 17
   Production 41 30 32 7 0 2 19
   Prices Received for Finished Product 52 48 51 6 2 7 22
Expected Conditions in Six Months 33 37 33 14 10 12 28
   New Orders Volume 40 45 42 20 12 17 35
   Number of Employees 48 45 46 11 11 15 33
   Production 48 44 50 25 14 19 40
   Prices Received for Finished Product 64 56 60 13 16 26 42
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