Despite disruption to global supply chains and increasing delivery times, orders for durable goods increased again in June, the 13th month of increases out of the past 14 months, according to Commerce Department data released on Tuesday.
Readings from the RSM US index and regional Fed banks show continued strength in manufacturing.
This is confirmation of a recovery for the sector and the end of the manufacturing recession that gripped the American economy from 2018 to 2020. And the composite manufacturing and trade sales indicator in May continued its surge, increasing by 10.2% compared to the low point of the pandemic last year.
Those increases have pushed confidence in the recovery as reported in surveys of manufacturers conducted by six regional Federal Reserve banks.
That confidence is tempered by supply chain bottlenecks and price increases and the observable fact that for now demand will continue to outstrip supply, limiting growth opportunities for firms emerging from both the pandemic and the manufacturing recession caused by the trade war.
While these challenges are serious, we do not expect them to derail the economic expansion underway in the broader manufacturing complex nor the economy.
Regional Fed surveys
Manufacturers in the Philadelphia Fed region reported elevated general activity, shipments and new orders in July, but at lower levels than in June. Notably, 63% of the firms expect to increase employment over the next six months and nearly 74% of the firms indicated increases in wages and compensation costs over the past three months. Price pressures were reported by 72% of survey respondents.
Business activity grew at a record-setting pace in New York State, according to July’s survey. Delivery times continue to lengthen and prices were higher, but that was accompanied by robust expansion of new orders and shipments, and strong growth of employment.
Shipments and employment increased in the Richmond Fed region, though new orders slipped even as they remained expansionary. Respondents noted a struggle to find workers with the necessary skills.
Prices grew for the fourth straight month in the Kansas City region, with firms expecting materials prices and finished goods prices to rise over the next six months. Increased activity was reported at durable goods plants, especially primary and fabricated metals, computer and electronic products, transportation equipment, and furniture manufacturing.
The July survey in the Dallas region was reported with the headline “Robust Expansion in Texas Manufacturing Carries On.” The new orders index remained at quadruple the series average, and labor market measures indicate continued growth.
RSM US Manufacturing Outlook Index
The RSM US Manufacturing Outlook Index is a composite of those surveys and is highly correlated with U.S. real GDP growth, and with nominal and real manufacturing growth.
July marks the 12th consecutive month of increasing confidence in the manufacturing sector, with sentiment now reaching more than two standard deviations above what would be considered normal. As our analysis indicates, the index rarely goes above 2.0 standard deviations, with most of these elevated episodes following a recession.
Increases in manufacturing will increase the demand for labor, with positive effects on wages, consumer spending and the growth of demand in downstream sectors. Should vaccinations overcome the latest surge in COVID-19 cases, we 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.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
