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Pace of Growth Slows in Manufacturing

CHICAGO — Manufacturing activity continued to expand in 10 of the 12 Federal Reserve Bank districts through the end of May, but was somewhat less frenetic than in the first quarter, according to the Beige Book, the Fed’s regional economic activity survey conducted every six weeks.

Demand for metal products has leveled off in many districts, according to the report, which is based on surveys of companies in several major producer and service industries.

The Cleveland district reported that steel producers saw shipping volumes level off after a strong first-quarter performance, while the Chicago district noted a decline in second-quarter orders for industrial metals, "although orders for the third quarter were coming in at a more positive pace."

Most districts continued to report widespread increases in commodity prices, with manufacturers said to be passing along a portion of the higher costs in the form of price hikes and fuel surcharges.

A buyer in the Chicago region suggested that the recent volatility in industrial metal prices "was leading some customers to delay orders, expecting lower surcharges in the coming months and to avoid getting caught holding inventory at elevated prices."

Steel producers and service centers in the Cleveland district said the rise in shipping volumes in the first quarter, driven by capital goods, vehicles and energy-related industries, was beginning to taper off due to pricing issues and declines in consumer demand.

Cleveland district manufacturers and distributors anticipate volumes remaining at current levels until the third-quarter seasonal slowdown. Industry sources said steel and scrap prices have peaked and are expected to begin falling back.

Spot prices for coal, especially metallurgical coal, moved higher in the Cleveland district, which was attributed in part to a rise in transportation costs. Severe spring weather in the Midwest is interfering with coal shipments to utilities and exports via New Orleans.

In the Richmond district, a producer of coated steel said order volumes had been falling since the first quarter. Other companies said their customers were "strongly resisting" any price increases despite rising commodity prices. "Our latest manufacturing survey (covering the Mid-South) revealed that prices of raw materials rose notably over the last month, but prices of finished goods were up only moderately," the report said.

Steelmakers in the Chicago district reported marginally lower capacity utilization rates, while manufacturers of other industrial metals noted a softening in orders for second-quarter delivery.

Minneapolis district survey participants said activity in the energy and mining sectors increased since mid-April, with projects in oil, natural gas and wind energy developing apace. "Iron ore mines in northern Minnesota are operating at full capacity," the report said.

The Beige Book said that auto sales were mixed but fairly robust in most parts of the country. However, widespread supply disruptions, primarily related to the March 11 earthquake and tsunami in Japan, "substantially reduced the flow of new automobiles into dealers’ inventories, which in turn held down sales. Widespread shortages of used cars were also reported to be driving up prices."

A survey respondent in the Chicago district said some automakers and their suppliers were moving up planned summer shutdowns to June from July in order to give supply chains time to fill the gaps in Japanese parts shipments in the wake of the March disaster. These industry players will "be in better position for a ramp-up in production in the third quarter," the Chicago district respondent said.

Drilling activity was reported as strong and growing in the Dallas district, and work was being re-permitted in the Gulf of Mexico, survey respondents told the Fed.

The San Francisco district reported that oil extraction activity grew strongly in response to rising demand overseas, and that demand for natural gas continued to expand. In the Minneapolis and Kansas City districts, oil exploration and drilling activity increased.

Not a single district could cite an uptick in housing prices over a six-week period in the spring, which normally sees a seasonal improvement. Half of the districts saw declining prices, and residential real estate sales remained weak nationally. Residential construction activity "has remained generally depressed, with a number of districts reporting a large overhang of distressed properties," the report said.

Non-residential construction, though widely reported to be at very low levels, rose modestly in the Boston, Chicago, Dallas and Minneapolis districts, and Cleveland observed a pickup in industrial and high-end commercial development.

Survey respondents nationally generally retained an optimistic outlook, according to the Fed, "although less so than the last report." Some business investment and capital projects are being delayed amid uncertainty about the pace of economic growth, even if their manufacturers’ sales were improving and they planned to increase production modestly.

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