Manufacturing in the Southeast has been relatively strong in 2014. According to the Southeast Purchasing Managers Index (PMI), manufacturing activity expanded every month this year. The latest report, released on August 5, indicated that activity continued to expand in July. However, a couple of important indicators took a large step back from their recent highs.

The Atlanta Fed's research department uses the Southeast PMI to track regional manufacturing activity. The Econometric Center at Kennesaw State University produces the survey, which provides an analysis of current market conditions for the manufacturing sector in Alabama, Georgia, Florida, Louisiana, Mississippi, and Tennessee. The PMI is based on a survey of representatives from manufacturing companies in those states and analyzes trends concerning new orders, production, employment, supplier delivery times, and inventory levels. A reading above 50 indicates that manufacturing activity is expanding, and a reading below 50 indicates that activity is contracting.

The Southeast PMI fell 4.0 points in July compared with June, but the overall reading remained above the 50 threshold at 51.3 (see the chart below). July was the third consecutive month the overall index has declined. Some notable aspects from the survey:

  • New orders: The new orders subindex and production subindex decreased significantly last month, declining 14.2 points. The large month-over-month decrease in new orders, while not ideal, is not entirely unusual. During the last three years, the subindex has experienced similar swings during the summer months. For instance, new orders fell 22.6 points during May and June 2012 and 11.7 points in July 2013. Still, the 24.3 point decrease over the last two months is significant.
  • Production: The production subindex fell 8.5 points from June to July, and it historically has followed a similar pattern to new orders, experiencing notable falls during the summer. Meanwhile, factories appear to be increasing payrolls.
  • Employment: The employment subindex rose 1.9 points compared with the previous month.
  • Supply deliveries: The supplier deliveries subindex fell 3.8 points compared with June, suggesting that manufacturers are receiving their inputs slightly quicker.
  • Finished inventory: The finished inventories subindex rose 4.7 points during July, indicating inventory levels are slightly higher.
  • Commodity prices: Input prices fell 0.9 points in July to 57.5, suggesting that moderate price pressures continue.

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Manufacturing contacts' optimism remained subdued during July. When asked for their production expectations, 40 percent of survey participants expect production to be higher in the next three to six months. That level is up from June's mark of 34 percent.

So is the stage set for another decrease in August? That's hard to say. During the last few years, manufacturing activity has tended to pull back this time of year. The national PMI, produced by the Institute of Supply Management, hit its highest level in more than three years during July. (I should note that the Southeast PMI is not a subset of the national one). That movement bodes well for the national picture and should help bolster activity in the South. It's always important to remember that although manufacturing activity may be leveling off, it is still expanding overall. So don't fret—enjoy what remains of the summer!

By Troy Balthrop, a senior Regional Economic Information Network analyst in the Atlanta Fed's Nashville Branch