If manufacturing were the sole determinant of the business cycle, we might anticipate a quicker assignment to the official end of the 2020-21 recession. For now, we’ll have to settle for increasing confidence in a sustainable recovery as an indication that the economy has entered into expansionary terrain.
Orders for durable goods increased again in May, and the composite manufacturing and trade sales indicator continued to soar in April, helped along as retail establishments come back to life after pandemic shutdowns.
Surveys of manufacturers conducted by six regional Federal Reserve banks reflect robust confidence in the outlook for manufacturing, despite being tempered by supply chain bottlenecks and price increases. While those bottlenecks, rising delivery times and increasing costs of goods used at earlier stages of production continue to be a challenge, they will not derail improvement in the economy.
The RSM Manufacturing Outlook Index is a composite of those surveys and is highly correlated with U.S. real gross domestic product growth, and with nominal and real manufacturing growth. After slipping in April, the RSM index for June increased again to 1.6 standard deviations above what would be considered normal levels of manufacturing confidence.
This is the fourth consecutive month of significant, above-normal sentiment and an important milestone for the economic recovery. As our analysis indicates, the index rarely goes above 2.0 standard deviations, with most occurrences in the period following a recession. Because the health crisis took a greater toll on the service sector, the K-shaped recovery has made the job of pinpointing the end of the recession that much more difficult.
Nevertheless, manufacturing growth will increase the demand for labor, which will have positive effects on wages, consumer spending and the growth of demand in downstream sectors.
We anticipate the domestic economy will continue to expand as vaccinations overcome the spread of the coronavirus both here and among our trading partners. As such, 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.
About the manufacturing surveys
Manufacturers in the Philadelphia Fed region reported increases in sentiment of future activity, with current activity moderated by supply chain issues. Perhaps most important were the reported increases in employment, which will be important for sustaining the recovery.
Business activity continued to expand in New York State, though at a slower pace than last month. Supply chain bottlenecks remain, but employment and the workweek gained modestly.
Increased sentiment reported in the Richmond Fed region was driven by an increase in the new orders index, while shipments and employment remained expansionary.
Manufacturing activity in the Kansas City region was centered in durable goods plants, with the survey identifying primary and fabricated metals, machinery, computer and electronic products, furniture, and transportation equipment manufacturing. There were modest employment gains from the previous month.
Surveys in the Dallas region reported sharp increases in sentiment. This was in response to the increase in new orders, while increases in capacity utilization and employment indicated accelerating growth.