Monthly surveys of manufacturers, conducted by five regional Federal Reserve banks, show improvements compared to a dismal 2024.
But there were signs of backtracking at the start of the year. We can observe inside the Federal Reserve regional surveys that prices paid and expectations for capital expenditures have diverged, which is likely because of the onset of higher trade taxes.
Read more of RSM’s insights on manufacturing and the real economy.
In any given quarter, between 40% and 45% of imports are intermediate goods used in manufacturing.
Until the new rules of the road are established one should anticipate volatility across asset markets and a risk-averse behavior inside the manufacturing sector around capital goods orders.
Our RSM US Manufacturing Outlook Index remains underwater, with a Z-score of negative 0.8, where zero indicates normal manufacturing conditions, positive values indicate above normal manufacturing activity and negative numbers indicate less than normal activity.
The Philadelphia region reported increased activity in January and February, the first time since 2022 that there were two positive months in a row.
And manufacturers in the Richmond area reported increased activity in February for the first month since October 2023.
Because manufacturers now expect input prices to continue rising, they have been frontloading supplies in advance of an increase in trade taxes. That increase may set up a decline in capex orders in the second quarter of the year.
The long-term relationship between expectations of higher prices and expectations for capital expenditures seems to have broken down in the February survey.
While all regions expect higher input prices, expectations for capital spending dropped substantially in the New York, Philadelphia and Kansas City regions, with moderation of expectations in Richmond and Dallas.
It is only one month, but it might best characterize the uncertainty gripping the economy.
