The RSM US Manufacturing Outlook Index receded again in January, providing another indication of the direct effect of the omicron variant on the business community and a sign of the eventual moderation of the post-crisis surge in growth.
While the manufacturing sector continued to grow, the increase in overall activity slowed.
While the manufacturing sector continued to grow, the increase in overall activity slowed as the economy absorbed another pandemic-induced shock amid a decline in the number workers on the job.
We expect a slowdown in hiring in general and in the manufacturing sector in particular when the January employment report is released on Friday.
As our analysis indicates, the RSM index rarely goes above 2.0 standard deviations, with most of these brief elevated episodes immediately following a recession.
This month’s value of 0.6 standard deviations above normal for manufacturing conditions has dropped substantially from December’s value of 1.2. It nevertheless suggests an expansionary production sector—with only 35% of the months since 1968 having higher results.
Our index is a composite of surveys of manufacturing activity conducted by five regional Federal Reserve banks.
The results in January continue to suggest not only that manufacturers are finding ways to work within the parameters of longer delivery times and rising prices, but also that they are contending with staffing challenges as the omicron variant spreads.
Because of the importance of manufacturing to the downstream economy, the health and prospects of the manufacturing sector are indicative of potential overall economic activity.
Manufacturing activity stalled in New York State after 18 months of expansion. In a survey conducted from Jan. 1 to Jan. 10, an equal number of manufacturers reported that conditions had improved as reported that conditions had worsened. Though shipments held steady, there was drop in new orders. A slower pace of price increases was reported, while hours and employment levels were reduced.
Manufacturers remained optimistic, and they anticipated increases in capital and technological spending.
There was a bounce in manufacturing activity in the Philadelphia Fed region, which recouped about a third of December’s losses. In the survey conducted from Jan. 10 to Jan. 18, firms were reporting recoveries in shipments and new orders but a decelerating rate of employment gains and hours.
Firms are expecting an average 9% increase in raw materials prices in the year ahead and a 6% increase in energy and total compensation costs, which includes a 4.9% increase in wages.
The jump in expectations for future activity erased last month’s decline.
Activity in the Kansas City Fed’s Tenth District accelerated during the month, despite staffing issues related to COVID-19. The Jan. 27 report identified factory growth driven by activity at durable goods plants, especially for primary metals, machinery, electrical, furniture and transportation equipment.
Though the price of raw materials continued to decline slightly from elevated levels during the month, expectations are for price increases for raw materials and finished goods.
In a special survey, more businesses reported negative impacts because of COVID-19 than during the December 2020 wave of infections. Of the firms facing labor shortages, 69% reported adding overtime for current workers and 65% reported delays in orders. And more than a third of firms are anticipating decreased business activity over the next six months because of the surge in COVID-19.
Manufacturing activity in the Richmond Fed’s Fifth District softened somewhat in January because of declines in new orders and employment. The third component in the bank’s composite index, the index for shipments, increased slightly on the month as reported on Jan. 25.
Fewer manufacturing firms increased hiring compared to December, and firms continued to report challenges in finding workers with the skills that the firms need. Wage increases were the second highest on record, with firms expecting wage increases to continue.
The average growth rate of prices paid and prices received by survey participants also increased.
Texas manufacturing activity decelerated in December, according to a survey by the Dallas Fed conducted Jan. 18 to Jan. 26. The production index, a key measure of state manufacturing conditions, came in at an eight-month low, but remains indicative of above-average output growth.
While the new orders and growth rate of orders indexes held steady, suggesting a continuation of elevated demand growth, capacity utilization and shipments fell considerably.
Expectations regarding future manufacturing activity remained highly positive but receded slightly. The survey found that other measures of future manufacturing activity like capital expenditures and employment showed mixed movements but remained solidly positive.
