The Kansas City Fed asked manufacturers this month how much of their higher costs they can recover through price. Half said a fifth or less, and more than half said their customers have become more sensitive to price since the spring. With raw material prices still climbing, the margin will have to come from somewhere other than the price list.
For most of the past year the inflation story on the plant floor has been about input costs: diesel, steel, aluminium, freight and health insurance. The October regional factory surveys add the other half of the equation, and it is the more uncomfortable half. Costs are still rising, but a growing share of manufacturers say they cannot hand those increases on, and their customers are getting harder to sell a price rise to. That turns a cost problem into a margin problem, and it changes where operations leaders should be looking for relief.
The Kansas City Fed's October Manufacturing Survey, released on October 22, asked plants across seven states two special questions about pricing. The survey was open from October 14 to 19 and drew 95 responses. On the first question, how much of their higher costs they can pass through as higher prices, 16% said none at all and 35% said between 1 and 20%. Another 7% said 21 to 40%. Only 13% said they could pass on 81 to 100%, and just 1% said more than 100%.
In other words, 58% of these manufacturers can recover no more than 40% of their cost increases through price. The rest is absorbed in margin, or has to be found elsewhere.
The second question explains why. Asked how their customers' sensitivity to price had changed since six months ago, 22% said customers are much more sensitive and 31% said somewhat more sensitive. Only 6% said customers had become less sensitive. Cortney Cowley, the bank's Oklahoma City Branch executive, summarised it plainly: "Over half of firms reported their customers are more sensitive to price changes now than six months ago."
The comments respondents attached show the split. One reported that "fuel surcharges are being implemented as we can no longer absorb increased fuel cost." Another wrote that costs from fuel, delivery and health insurance "continue to reduce margins," adding that competition "continues to push prices down." A third described customers ordering later and more cautiously, with shipments "supported by our existing backlog rather than new orders." A minority are still in a strong position; one firm said its customers "are not blinking" at higher prices.
The pressure on the cost side has not eased. The bank reported that growth in raw material prices continued to rise in October while growth in finished goods prices eased, which is the textbook shape of a margin squeeze.
Texas shows the same gap more starkly. The Dallas Fed's Texas Manufacturing Outlook Survey, published on October 26, put its raw materials prices index at 55.3, up from 52.2 and almost double its series average of 28.1. Its index for prices received for finished goods rose to 29.9. Some 56.6% of Texas firms reported paying more for materials, and the production index fell to 15.8 from 29.5 as new orders slowed. One beverage producer told the bank: "We are profitable, but barely."
The picture is not uniform. The Philadelphia Fed's October survey found its prices received index climbing to 40.1 from 31.3, close to its prices paid reading of 43.2, so some firms in that region are recovering more of their costs. But manufacturers there also expect both indexes above 62 over the next six months, which means the argument with customers about price is far from over.
If across-the-board list price increases are meeting resistance, the remaining levers fall into two groups. The first is pricing that is more precise than a blanket rise. The second is getting more saleable output from the cost base the plant already carries.
On the first, the aftermarket is the obvious place to look. BCG's analysis of industrial service businesses found that services typically earn gross margins about twice the 15 to 25% earned on equipment sales, and that spare parts and consumables average gross margins of 50% of sales. BCG also notes that many companies responded to inflation with across-the-board price increases, and argues for value-based pricing instead. It reports that an AI-supported, value-based approach raised EBIT on spare parts sales by three to four percentage points. A parts catalogue usually contains both commodity items that customers compare closely and critical, hard-to-source items where the value of availability far exceeds the cost. Pricing them the same way leaves margin on the table.
On the second, the Kansas City comment about customers ordering closer to need matters for the plant floor. Smaller, later and more varied orders reward lines that can change over quickly and run mixed product without losing throughput. Every hour of output recovered from changeovers, waiting and miscommunication between shifts spreads fixed cost over more units, which is a margin gain no customer has to approve.
The October surveys do not describe a recession. Activity is still growing in all three regions, and expectations remain positive. What they describe is a market where cost increases no longer travel cleanly to the customer. Plants that price with more precision and squeeze more output from every shift will hold their margins; those waiting for the next list price increase to land may wait a long time.
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