Manufacturing conditions in September remain far above recession levels, suggesting a positive outlook for the economic expansion.
The manufacturing sector remains on an extraordinary run that began last year.
Yet surveys of manufacturers conducted by five of the regional Federal Reserve banks once more pointed to supply chain and labor issues and a reassessment of their outlook, implying a bumpy road ahead as those constraints limit growth.
The RSM US Manufacturing Outlook Index is a composite of surveys conducted by five of the Federal Reserve banks. And because of the importance of manufacturing to the economy, the health and prospects of the manufacturing sector are indicative of potential economic activity.
The manufacturing sector remains on an extraordinary run that began between waves of coronavirus infections in the second half of last year.
For the past eight months, activity among the five regional banks has bounced between one and two standard deviations above what would be considered normal levels of manufacturing confidence.
As our analysis indicates, the RSM index rarely goes above 2.0 standard deviations, with most of these brief elevated episodes in the period immediately following a recession.
This month’s value of 1.1 standard deviations is also exceptional—with only 20% of the months since 1968 having had higher results. The dip below its six-month average of 1.6 during August and September reflects confidence in an expansion now moderated by supply chain and labor disruptions.
There are some differences developing among the regions. The Philadelphia, New York and Kansas City areas appear to be holding onto gains made over the past six to nine months. There are worsening supply-chain issues and a slippage in Dallas, and a two-month drop in activity reported in the Richmond area.
After an August swoon, manufacturing activity in the Philadelphia Fed region jumped in September, with a third of the firms reporting increases in new orders and only a handful reporting a decrease.
In the Philadelphia Fed survey, supply chain issues and labor issues were indicated as factors constraining current capacity use.
There were moderating indications in both employment prospects and prices paid, however, and while the survey suggested continued expansion, indices of future general activity and new orders may have peaked.
Interestingly, the results of a special question in the survey by the Philadelphia Fed found that supply chain issues (87% of respondents) and labor issues (74% of respondents) were indicated as factors constraining current capacity use at a median level of 70% to 80%. (Only 15% of respondents mentioned COVID-19 as limiting factor.)
There was an equally strong resurgence of activity reported by manufacturers in New York State. New orders, shipments and unfilled orders all increased substantially, according to the report from the New York Fed. At the same time, the delivery times index reached a record high and indexes for both prices paid and prices received were at or near record highs.
Of note, there was strong growth in employment, and a sense that conditions would improve over the next six months, with a marked increase in capital and technology spending plans.
In our opinion, those investment plans are encouraging in terms of global competitiveness.
Factory growth in the Kansas City region remained elevated but moderated slightly. It was reported to be driven by acceleration in durable goods manufacturing—in particular primary metals, computer and electronic products, and transportation equipment. The latest report also noted that nondurables manufacturing grew more modestly.
Respondents identified costs and lead times of raw materials as major problems.
Manufacturing in the Dallas region remained solid in September, with respondents reporting increases in shipments, capacity utilization, employment and prices. But the survey also reported slippage in new orders, and in the general outlook.
More than half of the respondents reported worsening supply chain conditions, with 65% of manufacturers now experiencing supply-chain disruptions or delays, up from 35% in February.
Manufacturing activity softened slightly in the Richmond Fed area with drops in shipments and new orders. And while many firms reported increased employment and wages in September, finding workers with the necessary skills remained a challenge. More firms reported increases in prices paid, with the expected growth to slow in the next year.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
