Surveys carried out by four of the six regional central banks reported elevated manufacturing conditions, though there was some slippage from the lofty levels of the previous month.
Rising prices and supply chain bottlenecks were the most likely reasons for the moderation of sentiment, providing confirmation of the difficulty of reviving an economy.
While manufacturing conditions in the economy remain robust for the most part, and even red hot in certain subsectors, constraints to global supply chains will put a ceiling on growth in many sectors and subsectors until those bottlenecks can be resolved. And that will dampen overall manufacturing sentiment albeit at elevated levels.
Sentiment in the Philadelphia region came back down to earth in May as “current indicators for general activity, new orders and shipments declined from April’s readings but remained elevated.”
Manufacturers reported that “employment increases were less widespread this month” and that indices of both input prices and prices received reached long-term highs. All in all, expectations were for growth over the next six months.
Manufacturers in the New York area maintained their views of an expansionary climate, with modest growth in employment and hours worked, and in increasing prices paid and received. Those trends were expected to continue over the next six months.
Manufacturing activity in the Richmond Federal Reserve district increased again, with respondents to the survey alluding to supply chain bottlenecks. The Richmond survey found that a majority of firms reported lengthening vendor lead times, backlogs of orders and record low inventories of raw materials.
Growth in manufacturing activity in the Kansas City region “was driven higher by increased activity at durable goods plants, especially for primary and fabricated metals, machinery, furniture and transportation equipment manufacturing.” Last month’s euphoria was seemingly moderated by about “84% of firms indicated rising material prices” and that delivery delays have “negatively affected their firm.”
The elevated sentiment for the future growth in the manufacturing sector is most likely based on increased orders for durable goods. Orders in April this year were 6.6% higher than February 2020, the month before the collapse. Furthermore, before the Great Recession the average durable goods orders grew at an average 4.4% yearly rate.
After decades of manufacturing decline — and a trade war and a pandemic – a 20% uptick relative to the growth of orders in a more industrialized era is a healthy sign of a sustained recovery.
RSM US Manufacturing Outlook Index
The RSM US Manufacturing Outlook Index is a composite of those surveys and is highly correlated with U.S. real GDP growth and with nominal and real manufacturing growth. The preliminary composite RSM index for April slipped a bit, to 1.8 standard deviations from last month’s value above 2.0 standard deviations. That suggests that sentiment among manufacturers remains higher than what would be expected, and that is an important milestone for the economic recovery.
Increases in manufacturing will increase the demand for labor, which will have positive effects on wages, consumer spending and the growth of demand in downstream sectors.
We are anticipating the domestic economy to continue to expand as vaccinations overcome the spread of the coronavirus both here and among our trading partners. We could expect these high levels of manufacturing confidence to be sustained, with the potential that stimulus spending and technology investment will provide the basis for further manufacturing gains.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.