The downturn in manufacturing activity continued for the sixth consecutive month in October, according to the RSM US Manufacturing Outlook Index. With surging inflation and rising interest rates acting as a deadweight on business activity and expansion, it is likely that the global economy is either in or soon will be in recession.
Our composite measure of manufacturing activity shows that the decline has reached more than 1.6 standard deviations below normal.
While the U.S. economy is not in a recession, we attach a 65% probability of that occurring over the next 12 months and think it realistically will happen by the second quarter of next year. It is important that middle market firms prepare for a downturn.
Our composite measure of manufacturing activity—comprised of manufacturer surveys conducted by five regional central banks—shows that the decline has reached more than 1.6 standard deviations below normal.
Although month-to-month activity has shifted between expansion and contraction, the past three months have been the rare occasion when all five bank surveys have indicated either below-normal levels of activity or outright contraction.
Despite this slowdown and pessimistic expectations, firms continue to report increased employment, responding to the tightness in the labor market with increased capital expenditures on productivity-enhancing equipment.
Regional surveys
Manufacturing activity declined in the New York region, according to a survey collected in the first week of October. While 23% of respondents reported that conditions had improved over the month, 32% reported that conditions had worsened.
New orders remained modestly positive, but current shipments plunged, reversing last month’s gains.
Delivery times held steady and prices paid increased, while inventories increased. There were modest increases in employment levels and hours worked.
Firms continue to anticipate moderate increases in capital and technology spending while expecting employment to continue to expand. At the same time, they expect decreases in new orders and shipments.
There was an overall decline in manufacturing activity in the Philadelphia Fed’s region, according to a survey conducted between Oct. 10-17. Although most firms reported no change from the previous month and 15% reported improved conditions, nearly a quarter of the firms reported decreases.
The bank’s indicator for current activity has been negative in four of the past five months. And firms have held contractionary expectations, beginning in June.
Firms continued to report increases in employment with expectations of those increases continuing over the next six months. There was a slight uptick in prices for the month.
In special questions, firms expect to increase their capital expenditures next year, centered on non-computer equipment and energy-saving investments.
Manufacturing firms in the Richmond Fed’s Fifth District reported weaker conditions in October, according to a survey released on Oct. 25. The overall index was once more negative, with a notable deterioration in two of its three components: shipments and new orders. The employment component remained at neutral as hiring challenges persisted.
There was little sign of additional supply chain relief after the improvements of previous months and as prices remained elevated.
Firms continue to anticipate increased capital expenditures.
Manufacturing activity decelerated for the seventh consecutive month in the Kansas City Fed’s Tenth District. The survey’s monthly index for October turned negative for the first time since May 2020, with subdued expectations.
Indexes fell considerably for production, shipments and new orders, driven by decreased activity in computer and electronics, wood, primary metals; and plastics and rubber manufacturing.
Firms still reported slight gains in employment, however, with 65% reporting increased resources for training workers to meet skill requirements. Because of labor shortages, the same percentage of firms reported investing or planning to invest in labor-saving automation strategies.
Production activity in Texas decelerated during the month while perceptions of general business activity have remained negative for six consecutive months.
Of greater concern, though, was the further drop in the new orders index, which has been negative for the past five months, suggesting a continued decrease in demand.
Still, the employment index, as in other regions, showed robust employment growth. More than 63% firms reported being understaffed, with 56% trying to hire or recall workers.
The survey of 96 Texas manufacturers was collected Oct. 18-26.
