The decline in manufacturing sentiment and new orders strongly supports our call of risk to the economic outlook linked to deflation unleashed by the COVID-19 pandemic.
The RSM Manufacturing Outlook Index is now tracking at 6.3 standard deviations below normal conditions, surpassing levels seen during Global Financial Crisis of 2007-08 and even the global debacle of the July 1980 “double dip” recession.
This reading strongly suggests that the Institute of Supply Management’s Purchasing Managers Index—a closely watched gauge of manufacturing activity—will post a historical low of 36 in the time series when ISM releases its monthly report on May 1.
The decline in manufacturing sentiment and new orders strongly supports our call of risk to the economic outlook linked to deflation unleashed by the COVID-19 pandemic. This stands in stark contrast to what we think are misplaced and erroneous market concerns around inflation that some think will be caused by fiscal and monetary policy. We think that such market sentiment is out of touch with the damage the pandemic has caused and will continue to cause to the real economy.
The following figure shows that reaching below two standard deviations is a rare occurrence, and has signaled every recession since 1970. We believe that the economy entered recession in March 2020. The projected downturn in manufacturing is occurring in circumstances similar to those of the 1980 recession, which occurred in the midst of an oil glut brought on by a lack of demand. Uncertainty in the energy market, underscored by the significant drop in oil prices, only adds to the concern over the depth and reach of the recession in which the U.S. economy is ensnared.
As the figure below shows, manufacturing sales were improving during a short bump from November 2019 through February 2020. This would not be atypical, with late-cycle bursts of demand often preceding the onset of a recession. But surveys by the regional Federal Reserve Banks suggest that positive trend is coming to an end.
Manufacturing sentiment reported in April by the New York, Richmond, Dallas and Kansas City regions hit record lows, and in the Philadelphia region was second only to the 1980 recession. To the extent that surveys are an indication of future sales, the drop in manufacturing sentiment anticipates a recession rivaling those of 1980 and 2008-09.
Guide to the RSM Manufacturing Outlook Index
Six of the regional Federal Reserve banks conduct monthly surveys of manufacturing activity and sentiment. We’ve aggregated those surveys into the composite RSM Manufacturing Outlook Index, which anticipates the direction of national manufacturing activity.
The RSM index is measured in Z-scores, which are the number of standard deviations from normal levels. The regional Federal Reserve surveys are reported as diffusion indices, which vary from bank to bank (but are generally measured as positive responses minus negative responses). The survey results are standardized relative to normally expected sentiment during the period from 1994-2008.
The table below shows that each of regional surveys has dropped in value since the peaks reached during the 2017-2020 period.
Time series for the individual surveys are included below, with the regional diffusion indices shown relative to the growth of national manufacturing sales.
Each of the surveys shows (1) a decline in manufacturing from 2017 through the present that coincides with a deceleration in manufacturing sales growth and (2) an uptick in manufacturing sales at the end of 2019 and into January and February 2020, followed by the sharp drop in the March and April surveys due to the U.S. coronavirus outbreak.
For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
*Note that the Chicago survey is updated through February.