By Xavier Fontdegloria

Activity in factories in the U.S. central region eased in September, according to data from a survey compiled by the Federal Reserve Bank of Kansas City released Thursday.

The Tenth District Manufacturing Survey's composite index fell to 22 in September from 29 in August, below the 30 reading expected by economists polled by The Wall Street Journal.

The indicator gauges manufacturing activity in firms located in the western third of Missouri, all of Kansas, Colorado, Nebraska, Oklahoma and Wyoming, and the northern half of New Mexico. Values greater than zero suggest growth, while values below zero indicate contraction. The index has been in expansion territory since June 2020.

"The pace of regional factory activity growth eased slightly but remained positive," said Chad Wilkerson, vice president and economist at the Federal Reserve Bank of Kansas City.

The U.S. industrial sector is expanding, but widespread supply-chain bottlenecks and labor shortages are constraining on production and firms struggle to keep up with orders.

The Kansas City Fed indicator data contrasts with other regional surveys gauging the manufacturing sector, which have shown signs of activity picking up pace in September compared with August.

The expansion was supported by a faster increase in durable goods, in particular primary metals, computer and electronic products, and transportation equipment, while nondurable goods manufacturing grew more modestly, the Kansas City Fed said.

The production index fell to 10 from 22 the previous month, signaling that output continued to increase but at a slower pace.

Demand showed signs of cooling. The volume of shipments index declined to six from 25 the previous, while the volume of new orders index decrease sharply to seven from 34.

The employment index fell slightly to 21 from 28, signaling that companies continued to hire workers, although labor shortages remained widespread. "Hiring and retaining low skilled workers has never been this bad in company history," one of the respondents said.

Supply constrains showed no signs of abating. The supplier delivery time index increased to 43 from 41 the previous, while the raw materials inventory index rose sharply to 29.

"Many firms continued to report rapid increases in input prices, difficulties hiring workers, and supply chain delays," Mr. Wilkerson said.

The index of prices paid for raw materials remained at a high 80, and the index of prices received for finished goods eased slightly to 40 from 61.

"We are absorbing input increases where we can, however our overall profit margin on finished products is suffering," another company said.

Manufacturing firms were optimistic about the short-term outlook. The future composite index, which relates to the outlook in the next six months, was broadly unchanged at 35 in September. Expectations for future production rose to 58, matching the survey record last seen in 2003.

Write to Xavier Fontdegloria at xavier.fontdegloria@wsj.com

(END) Dow Jones Newswires

September 23, 2021 11:42 ET (15:42 GMT)