fedgazette

District manufacturers: tough 2002, cautiously optimistic 2003

Results of the Minneapolis Fed's winter survey of manufacturers.

Toby Madden - Regional Economist

Published May 1, 2003  |  May 2003 issue

District manufacturing continues to struggle, but it appears that 2003 will be slightly brighter and produce increased business activity, according to results of the winter survey of manufacturers conducted by the Federal Reserve Bank of Minneapolis. (The Minnesota Department of Employment and Economic Development was responsible for the Minnesota portion of the survey.)

Most manufacturers reported a dismal second half of 2002 with decreases in orders, production, employment, investment and profits. However, there is slight optimism for the first half of 2003 with an expected uptick in orders and production, combined with level investment and employment activity. This comes despite manufacturers' predictions that the overall regional economy will struggle with higher inflation and lower investment and employment.

Although results across the district were similar, western Wisconsin respondents were the most optimistic, while responses from Minnesota reflected a less rosy outlook. "The manufacturing sector is in a recession regardless of what economists say," commented one Minnesota manufacturer.

Poor second half of 2002

During the second half of 2002, employment and profits decreased significantly from the first half of last year. This was true for all states in the district and for all but large employers, who saw level employment and slight increases in profits from the first half of 2002. Several manufacturers commented that the reduction in profits was due to stiff foreign competition and higher input costs. "Raw materials prices are up," said a midsize Montana respondent. A Wisconsin producer suggested that China should receive the survey.

Meanwhile, orders and production were level in the second half of 2002 compared with the first half of 2002. Wisconsin, North Dakota and Montana companies saw increases, while manufacturers in Minnesota, South Dakota and Michigan's Upper Peninsula reported weakened production. At the same time, large employers noted increases in orders and production, while smaller manufacturers described some declining output.

Early optimism in 2003

Overall, businesses are cautiously optimistic about their prospects for the first half of 2003. Manufacturers of all sizes across the district expect strong growth in orders and production in the first half of 2003 compared with the second half of 2002. Meanwhile, employment and investment is expected to decrease slightly for small firms in Minnesota, Montana and South Dakota, but rise slightly in medium and large firms in North Dakota and western Wisconsin.

While the overall outlook appears upbeat, comments from respondents were mixed. "Business rebounded in late 2002 continuing into 2003," wrote a small employer in Minnesota. "I expect it to be stable for at least six months," commented another Minnesota respondent. At the other end of the spectrum, a midsize employer in the Upper Peninsula noted, "I expect we'll be joining the bankruptcy group."

Regional outlook

Despite a somewhat positive outlook by manufacturers' about their own businesses, they are more pessimistic about the outlook for the overall regional economy. Their seemingly conflicting responses may reflect the overall uncertainty facing the U.S. economy. Manufacturers across all employment categories and geographic areas anticipate decreased district employment and consumer spending, and most also predict decreased investment in the first half of 2003 compared with the last half of 2002. Meanwhile, increased inflation is a concern as producers in all areas of the district expect higher overall prices in 2003.

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