The RSM Manufacturing Outlook Index is now 4.2 standard deviations below normal conditions, an assessment of manufacturing conditions that is not as dire as last month, but dire nonetheless. Perhaps last month’s reading of about six standard deviations below normal was an indication from manufacturers that things couldn’t possibly get any worse.
And indeed we do think that the economic free fall has ended. We expect the domestic economic manufacturing ecosystem has begun a slow crawl out of a deep recession. As the economy’s gradual reopening evolves, we anticipate that the auto industry is poised to be, like the housing industry, one of the leaders out of the recessionary abyss. But for now, the data remains bleak and more policy aid for the economy will be necessary before the all-clear can be sounded.
The figure below shows that any reading below two standard deviations is a rare occurrence, signaling every recession since 1970. And while we are not yet officially in recession—though we believe one started in March—the projected downturn in manufacturing is eerily similar to previous recessionary episodes. Manufacturing sentiment was already in decline before the shock from the pandemic sent it into free fall.
Our index is a composite of sentiment reported by manufacturers to the regional Federal Reserve banks of New York, Philadelphia, Chicago, Richmond, Dallas and Kansas City. Sentiment was at record lows in four of the six regional surveys reported in April; this month’s survey continues to anticipate a severe drop in manufacturing activity and the possibility of a recession rivaling the 1970s oil embargo shock, the 1980s energy-induced downturn and the 2008-09 financial shock and Great Recession.
As the figure below shows, the trend in actual manufacturing sales was already in decline when the coronavirus crisis began. Sales that had recovered from the 2015-16 mini-recession—peaking at a 7.9% yearly growth rate in May 2018—began to deteriorate as the U.S. trade war brought on the global manufacturing recession. Manufacturing sales in March this year fell by 4.9% compared to March 2019. (Manufacturing sales for April will be reported on June 9.)
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 Manufacturing Outlook Index is measured in Z-scores, which are the number of standard deviations from normal levels. The bank 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 average sentiment during the period from 1994-2008, just prior to the Great Recession.
The table below shows that each of the regional surveys has dropped in value since the peaks reached during the 2017-2020 period before the coronavirus crisis.
Regional surveys over time
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, which was followed by the sharp drop in the surveys reported in March through May due to the U.S. coronavirus outbreak. Note that the Chicago survey is updated through March.
