Sentiment among American manufacturers has receded again because of the rapid spread of COVID-19 that has taken a toll on the labor market, consumer demand and the economy.
Since bottoming out in April and then bouncing back by October, the RSM US Manufacturing Outlook Index is showing signs of retrenchment in some areas of the country. This implies downside risk on January manufacturing sentiment and activity despite what we consider to be still-strong levels of production.
The index is showing signs of retrenchment in some areas of the country.
Above-average manufacturing conditions were identified in only two of the five monthly industry surveys (Philadelphia and Kansas City) reported by regional Federal Reserve banks. The survey of manufacturers in Richmond indicated deteriorating conditions while New York and Dallas reported below-average conditions.
The takeaway is that there are positive signs of an economic recovery in the making — depending on the industrial base in the region — but there are also signs that the overall picture is tempering.
So while the RSM index remains positive at 0.4 standard deviations above normal in January, that’s considerably less than the 1.2 standard deviations above normal reported in the regional Federal Reserve bank surveys conducted last October.
There is no doubt that U.S. manufacturing sales and durable goods orders were improving going into the end of the year. But deteriorating labor market conditions and the delay in the vaccine rollout remind us that the sustainability of this most recent upturn is still to be determined.
On a broader scale, industrial production has been decelerating for 27 months and negative for 16 months in a row. The health of both the global economy and the American economy will be subject to the speed at which the global population is vaccinated.
Interestingly, forecasts for the Institute for Supply Management’s manufacturing index in January are centered on still-elevated values but with a slight decrease in purchasing manager sentiment relative to December. The ISM is set to announce its January survey results on Feb. 1.
Again, the resurgence of the pandemic in the weeks after the end-of-year holidays has the potential to become a drag on the recovery in the near term, should consumers continue to wait it out until the vaccine is distributed more widely.
Guide to the RSM US Manufacturing Outlook Index
Six regional Federal Reserve banks conduct monthly surveys of manufacturing activity and sentiment. We have aggregated those surveys into the composite RSM US Manufacturing Outlook Index that anticipates the direction of national manufacturing activity.
The index is measured in Z-scores, which are the number of standard deviations above or below normal levels. The bank surveys are reported as diffusion indices, which vary from bank to bank (but are generally measured as positive responses minus negative responses).
The survey results are standardized relative to average sentiment during the period from 1994 to 2008, just before the Great Recession. Values of the index below two are regarded as significantly different from zero and suggest abnormal levels of stress. Values above two indicate the possibility of a bubble, which could also have negative consequences for the economy – should that bubble burst.
The table below shows that regional sentiment remains lower than peaks reached between 2017 and the pandemic. The time series figures that follow show recoveries above those medium-term downtrends.
Regional surveys over time
Time series for the individual surveys are included below, with the regional diffusion indices shown relative to the growth of national manufacturing sales.
Each of the surveys shows:
- A decline in manufacturing sentiment from 2017 through the first months of 2020 that coincides with a deceleration in manufacturing sales growth, the global manufacturing recession, and a slowing domestic economy.
- A sharp drop in sentiment reported in early 2020 because of the U.S. coronavirus outbreak. That decline has been followed by a recovery that has broken above the 2017-2020 downtrends.
Note that we show the three-month moving average for each of the surveys. This is done to more easily identify the underlying trend in sentiment. Also, reporting on the Chicago survey is usually two months behind and as such is not reflected in the two latest monthly values of the RSM index.
New York Fed region
Sentiment in the region decelerated for the third month in a row as “business activity was little changed,” according to the survey. New orders and shipments “edged higher,” the survey noted, and firms remained optimistic “that conditions would improve over the next six months.”
Philadelphia Fed region
In January, “over 45% of the firms reported increases in new orders,” according to the survey. Expectations were for continued elevated activity, though at slightly lower levels than previous months.
Richmond Fed region
Richmond’s index dropped slightly “but remained in expansionary territory, as did all three of its component indexes — shipments, new orders and employment,” according to the survey. The survey indicated that “manufacturers were optimistic that conditions would continue to improve in the coming months.”
Chicago Fed region
The November 2020 survey noted that the “pace of manufacturing
activity decreased in Illinois, Indiana and Michigan, but increased
in Iowa and Wisconsin.” The result was a slight reduction in manufacturing’s contribution to overall economic growth.
Kansas City Fed region
The survey indicated higher rates of activity in January than in the previous month, and that COVID-19 vaccination was “a key factor in manufacturers’ overall business outlook for 2021, but with less impact on hiring and capital spending in the near-term.”
Dallas Fed region
The title of the Jan. 25 report is “Texas Manufacturing Expansion Moderates.” The survey indicated expansion of factory output in January, “albeit at a markedly slower pace.” The growth rate of new orders fell sharply, as did capacity utilization.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.