Midwest manufacturing is up but confidence is down

Midwestern factories reported strong sales in September but many still pulled back on hiring because of concerns over the Affordable Care Act and cutbacks in federal spending, according to a closely watched report released Tuesday.

Creighton University, which tracks the economies of Minnesota and eight other states in the central corridor of the country, found business confidence sagging. More than a third of the businesses it surveyed froze or cut hiring last month in anticipation of the Affordable Care Act, which began offering subsidized health insurance options to the uninsured effective Tuesday.

"Uncertainty surrounding the Affordable Care Act and the budget stalemates in Congress are causing firms to be much more cautious about hiring and have encouraged layoffs and cuts in hours worked," said Ernie Goss, author of Creighton's business conditions report and the university's Economic Forecasting Group.

Aside from the Affordable Care Act, a third of businesses reported being affected by federal spending cuts that took place earlier this year.

The combined weight of the Affordable Care Act, sequestration and new worries about the shutdown of the federal government that started Tuesday were enough to cause confidence levels to crash. And that's despite evidence that manufacturing economies actually fared well during September.

"The Mid-America survey points to growth for the final quarter of 2013," Goss said. The overall business conditions index rose to 54.8 from 53.8 in August for the nine-state region that includes Minnesota, Wisconsin, Kansas, Iowa, South Dakota, North Dakota, Nebraska, Arkansas, and Missouri. Any index above 50 indicates economic growth. An index below 50 suggest contraction.

The regional uptick mimicked a rise seen nationally. In a separate report Tuesday, the Institute for Supply Management found that 11 of 18 manufacturing sectors grew during September, which pushed up the monthly index by 0.5 to 56.2. That marked the fourth consecutive month of growth for the manufacturing sector.

Minnesota, which is home to a host of large product and equipment makers such as Toro, Graco, DataCard, Douglas Machine and Apogee Enterprises, reported strong sales of machines, parts and other long-lasting products during September.

The uptick was powerful enough to offset weakness seen by food processors. The Creighton report noted that businesses linked to the traditionally robust agriculture sector saw growth slow in August and September due to weaker prices for corn, soybeans, wheat and other commodities.

That economic blip will be watched closely going forward by ag equipment firms that have flourished in recent years. AGCO, Anderson-Crane, GVL Poly and Schaefer Ventilation have factories in Minnesota that have benefited from the booming farm economy since 2009. Pricing pressures could change that, Goss warned.

But despite worries over farms, health care and employment, economists were generally upbeat about the overall findings of both the ISM and Creighton University reports.

The September ISM manufacturing index was "stronger than expected as the consensus [from Wall Street analysts] was looking for a decrease," said Thomas Simons, vice president of Jefferies & Co. in New York said in a research note to investors.

"Taking this month's headline data, the strong subindexes and the upward momentum in many of the regional manufacturing sectors, there is a base of evidence building that shows that activity in the sector is accelerating."