Every year the Federal reserve produces the Beige Book, a report on the current economic conditions by the Federal Reserve District. We’ve summarized below where we stand in the commercial aerospace manufacturing side of the economy. Overall, it is good news for suppliers, although we have a long road ahead to fulfill current backlog. Read the full version here.

Manufacturing:

Three specific areas of strength in manufacturing were mentioned by multiple Districts: commercial aviation, autos, and construction materials. The Boston, Chicago, and San Francisco Districts reported exceptional strength in commercial aviation driven by record backlogs at major aircraft producers.

First District – Boston: Manufacturing and Related Services:

Many contacts say they are attempting to reduce inventories. In general, respondents report little pricing pressure from either suppliers or customers. One exception is a frozen fish producer for whom prices of shrimp and haddock were “through the roof.” Another exception is a producer of parts for the commercial aircraft industry who said that Boeing has been putting exceptional pressure on its suppliers to lower prices, something reported earlier by other firms in that industry.

Fourth District: Cleveland Manufacturing:

Reports from District factories indicated that demand continued at a moderate to robust level during the past six weeks. Firms seeing the strongest activity were suppliers to the aerospace, housing, motor-vehicle, and oil and gas industries. Declines in demand were attributed to seasonal variation The recently enacted federal budget agreement is viewed as providing a boost to defense contractors in the upcoming year. Compared to a year ago, manufacturing production levels are mainly higher. Almost all of our respondents expect demand will remain at current levels through at least the first quarter of 2014. Steel shipments during the fourth quarter were generally characterized as stable or slowly increasing. Demand is strongest from the transportation and oil and gas industries. Defense orders were still described as weak. Shipments in the first quarter of 2014 are expected to be higher relative to the previous quarter. Several contacts in the steel industry noted that confidence on the part of their customers is improving. District auto production showed a seasonal decline during November. However, November production numbers were moderately higher than those recorded a year ago.

Most manufacturers reported that their capacity utilization rates were within a normal range. Numerous respondents said that they have excess production capacity and could easily absorb any demand spikes. Auto parts suppliers were described as operating near capacity. One industry executive estimated that 85 percent of all parts suppliers need to increase capacity, but many are reluctant to do so. In contrast, aerospace suppliers have invested heavily in capacity expansion during the past year. A few steel producers reported lowering capacity utilization, due in part to excess global capacity. Capital expenditures for the upcoming fiscal year are expected to be in line with current year outlays or somewhat higher. Monies are being allocated primarily for rehabbing production lines, technology enhancements, and new equipment. Raw material prices were stable, except for a modest increase in metals. Several of our contacts announced price increases across their product lines, which will go into effect during the first quarter of 2014. On balance, factory payrolls were stable. A majority of our contacts cited rising healthcare insurance premiums as a concern.

Seventh District: Chicago Manufacturing:

Manufacturing
Manufacturing production growth was solid in late November and December. Contacts were generally optimistic about the outlook for manufacturing in 2014, pointing to expected strength in the auto, aerospace, and energy industries. The auto and aerospace industries in particular were a source of strength for the District in the second half of 2013. Low steel service center inventories continued to boost the demand for steel, and contacts noted that demand for other industrial metals also increased. Manufacturers of construction materials reported a moderate increase in demand as the housing market continues to improve. Increasing construction also led to some improvement in the demand for heavy equipment, though the overall level of activity remained soft. Demand for heavy- and medium- duty trucks was down following the pull-forward of spending earlier in 2013 in response to new EPA emissions standards. Manufacturers of durable consumer products and recreational vehicles also expected to see faster growth in 2014, with wealth gains from the rising stock market and home prices boosting demand.

Twelfth District – San Francisco Manufacturing:

Manufacturing
District manufacturing activity advanced during the reporting period of late November through late December. Semiconductor producers noted that business conditions improved gradually. Contacts from the commercial aerospace industry maintained a positive outlook based on strong financial performance of firms and further expansion in the backlog of orders for commercial aircraft. Defense-related manufacturers remained cautious, with many firms expecting to lay off workers as a consequence of delays or cutbacks in production contracts related to sequestration. Producers of pharmaceutical products were upbeat about growth prospects in the industry this year. A wood products manufacturer noted that orders and production activity expanded, spurring increased hiring. Relative to the previous reporting period, conditions held steady for steel producers; contacts reported stronger conditions for manufacturing of automobile and aircraft-related inputs than for nonresidential construction inputs. In addition, capacity utilization for steel producers was unchanged.