US: Kansas City Fed Manufacturing Index

Thu Jul 23 10:00:00 CDT 2015

Actual Previous
Level -7 -9

Deep continuing contraction is the score for the Kansas City manufacturing report where the headline index is little changed at minus 7. Order readings point to more trouble ahead with new orders at minus 6 and backlog orders at minus 14. Weakness in export orders, at minus 10, is a central negative for the report, as is hiring, at minus 19 and the workweek at minus 18. Price readings are steady and mute. This region's manufacturing sector, hurt by both exports and the energy sector, is badly depressed as is the Dallas manufacturing sector. Regional July reports from Dallas and Richmond will be posted early next week to round out the view for what looks to be another weak month for manufacturing.

The monthly Survey of Manufacturers provides information on current manufacturing activity in the Tenth District. The accumulated results also help trace longer term trends. The survey monitors manufacturing plants selected according to geographic distribution, industry mix, and size. Survey results reveal changes in several indicators of manufacturing activity, including production and shipments, and identify changes in prices of raw materials and finished products. Answers cover changes over the previous month, changes over the past twelve months, and expectations for activity six months into the future. The breakeven point for each index is zero with positive numbers indicating growth and negative numbers reflecting decline. The headline number is the composite index for current month activity. The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes.

The Kansas City Fed composite manufacturing index (and components) is a special type of index called a "diffusion index." A diffusion index measures how diffuse its components are-or how closely (or not) the components move together. That is, for the Kansas City Fed composite manufacturing index, are responses up or down? Diffusion indexes have different baselines for breakeven for zero growth. Some diffusion indexes have zero for the breakeven point and others (such as ISM) have 50 as the breakeven point. "Breakeven" means that higher numbers mean positive growth and below numbers mean contraction. And the further above breakeven indicates a stronger growth rate than just above breakeven. The same applies to below breakeven. A larger negative (below breakeven) indicates greater negative growth. Essentially, changes in the diffusion index indicate changes in the rate of growth or contraction.

If all members of a group of people (sample population) are asked if something has changed and in which direction, they will answer in one of three ways: it has not changed, it has increased, or it has decreased. Essentially, respondents in the ISM survey are asked whether activity for each of the indicators compared to the previous month are "Better," "Same," or "Worse." If all members of a group of people (sample population) are asked if something has changed and in which direction, they will answer in one of three ways: it has not changed, it has increased, or it has decreased.

The indexes for the Kansas City Fed report, which can range from 100 to -100, reveal the general direction of the indicators by showing how the number of plants with improving conditions offset those with worsening conditions. Index values greater than zero generally suggest expansion, while values less than zero indicate contraction. The closer index values are to 100, the more widespread are increases among respondents. The closer index values are to -100, the more widespread are decreases.

Investors track economic data like the Kansas City Survey of Manufacturers to understand the economic backdrop for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers a moderate growth environment that will not generate inflationary pressures. The survey gives a detailed look at Tenth District's manufacturing sector, how busy it is and where it is headed. Some of the survey indexes also provide insight on inflation pressuresincluding prices paid, prices received, wages & benefits, and capacity utilization. The equity market is also sensitive to this report because it is an early clue on the nation's manufacturing sector, reported in advance of the ISM manufacturing index and often in advance of the NAPM-Chicago index.