The RSM US Manufacturing Outlook Index remained solid in December at 1.3 standard deviations above neutral as the economy continued to expand into the end of the year. But that strength is in question as the omicron variant continues to spread.
The strength in the index reflects the overall recovery in the manufacturing sector, although the full impact of the omicron variant has yet to be felt.
Our index moderated during December, mostly on a slump in the Philadelphia area that offset solid gains in other regions, reflecting the overall recovery in the manufacturing sector following the downturn caused by the 2018-2020 trade war and the public health crisis.
While there was no evidence of a slowdown in overall manufacturing activity last month because of the omicron variant, that may change in the January data depending on that variant’s impact.
Our index is a composite of manufacturing activity surveys conducted by five regional Federal Reserve banks. The results in December show that manufacturers are finding ways to work within the parameters of longer delivery times and rising prices.
In many respects, the uncertainty around supply chains and rising prices will be the major impediment to growth in the manufacturing sector this year. And given manufacturing’s importance to the downstream economy, the sector’s performance is a vital factor to U.S. economic growth overall.
The December reports of increased orders and shipments—and particularly businesses’ planned capital and technology investments—suggest that there is a basis for sustainable expansion despite the challenges. In addition, reports of increased capacity utilization and inventories suggest the potential for a return to normalcy.
The RSM index rarely goes above 2.0 standard deviations, with most of these brief elevated episodes immediately following a recession. December’s value of 1.3 standard deviations above normal suggests an expansionary production sector—with only 15% of the months since 1968 having higher results.
New York
Manufacturing activity had strong growth in New York State, according to a survey collected from Dec. 2 to Dec. 9. The new orders index and shipments index were both little changed, pointing to another month of strong growth in both areas.
The unfilled orders index rose and delivery times lengthened significantly, but less so than last month. Inventories also increased modestly. There was a solid increase in employment and prices remained elevated, though at a slightly slower pace.
While forward optimism remained below the levels of September and October, firms continue to look for growth over the next six months and are planning significant increases in both capital and technology spending.
Philadephia
Manufacturing conditions in the Philadelphia Fed region moderated in December, remaining positive but falling to their lowest point in an otherwise stellar year.
In survey responses collected from Dec. 6 to Dec. 13, 90% of firms reported supply chain issues and 76% reported labor issues as factors constraining capacity utilization. Nevertheless, the median capacity utilization rate among the responding firms was 80% to 90%, 10 percentage points higher than in December 2020.
Indicators for prices paid and received remained elevated but posted declines during the month. And firms continued to report increases in employment, with expectations of overall growth over the next six months.
Kansas City
Factory growth in the Kansas City Fed’s Tenth District was driven by increased activity at nondurable goods plants, especially for paper, chemicals, plastics and transportation equipment. As reported on Dec. 16, the pace of growth increased for shipments, new orders and inventories.
Inventories rose compared to a year ago, along with production and capital expenditures. Expectations remained positive across a number of indicators, but the pace of expected growth eased from November to December.
Dallas
Texas manufacturing activity continues to increase, according to surveys in the Dallas region collected from Dec. 13 to Dec. 21.
The Dallas Fed’s production index—considered to be a key measure of state manufacturing conditions—was indicative of solid output growth. Other measures, including orders and shipments, dipped slightly, while the capacity utilization index inched up.
Firms reported wage increases of 7% last year, input price increases of 9.9% and selling price increases of 6.9%. Some 75% of firms expect to raise prices this year, while about 22% are offering variable pricing or contract contingencies. Only 40% of firms reported decreased operating margins over the past six months.
Richmond
Manufacturing activity in the Richmond area strengthened, driven by increases in shipments and new orders, according to surveys reported on Dec. 28. Employment—the third component of the Richmond Fed’s composite index—moderated but remained expansionary.
Backlogs of new orders and vendor lead times remained high, while inventories remained low.
Employment and wages increased in December, although respondents continued to report difficulty finding workers and expect this difficulty to continue. Prices paid and received increased, with firms expecting those growth rates to slow over the next year.
All the while, manufacturers reported continued investment spending.
