Kansas City Fed Manufacturing Survey Unexpectedly Plunges into Contraction

Factory activity in the American heartland unexpectedly declined in October, a survey from the Federal Reserve Bank of Kansas City showed on Thursday.

The Kansas City Fed said its survey of manufacturers in the region showed a slight decline in activity. The composite index—which averages the measures of production, new orders, employment, supplier delivery time, and raw materials—dropped to minus seven, the lowest reading since the pandemic-stricken May 2020.

Economists had forecast the index to rise to a reading of three from one in September.

“Regional factory activity declined slightly in October,” said Kansas City Fed economist Chad Wilkerson. “Indexes fell considerably for production, shipments, and new orders; however, firms still reported slight gains in employment.”

The indexes for production and shipments turned sharply negative. The production index fell deeper into negative territory, where it has now been for five months.

The measure of supplier delivery time stayed negative for the second consecutive month, suggesting that earlier improvements in supply chains had stalled. A report from the Richmond Fed this week said manufacturers in its area had seen little improvement in supply chains since August.

The measure of employment declined but remained in positive territory, indicating that payrolls grew but at a slower pace.

The Kansas City survey appeared to confirm indications of a steep slowdown in demand seen in other regional Fed surveys. Last week, the New York Fed reported that its gauge of manufacturing activity fell for the third straight month, deeper into contractionary negative territory. Similar to the Richmond Fed survey, the index declined amid high levels of inflation, with the prices paid index rising nine points to 48.6 and the prices received holding steady at a high level. The Philly Fed’s survey also showed inflation worsening while demand sagged.  The Richmond Fed survey also indicated a decline in manufacturing activity.

The survey covers manufacturers in the Tenth Federal Reserve District, encompassing the western third of Missouri; all of Kansas, Colorado, Nebraska, Oklahoma and Wyoming; and the northern half of New Mexico. The slower pace in factory growth in October was driven by decreased activity in computer and electronic, wood, primary metals, and plastics and rubber manufacturing.