The pullback in manufacturing continued into January, with the RSM US Manufacturing Outlook Index slipping further to nearly 2.8 standard deviations below conditions that would normally be expected.
But the pullback was tempered by an increase in capital expenditures, a reflection of the resilience in the American economy.
We think this current episode reflects the lingering effects on the U.S. manufacturing sector from:
- The month and a half strike by the United Auto Workers that ended Oct. 31.
- Nearly two years of tight monetary policy on overall demand.
- The ongoing turmoil surrounding Boeing.
The auto industry and Boeing have outsized rippling impacts on the U.S. manufacturing sector. And in just the past six months, there have been two episodes of 25% drops in Boeing’s share price, which exemplify concerns over the potential loss of its market share.
Our index is based on the surveys of manufacturing firms conducted by five regional Federal Reserve banks, with positive results indicating increased manufacturing activity and negative results indicating decreased activity.
During normal times, there are monthly ups and downs reported by manufacturing firms. But our index has been negative since May 2022, and significantly so in the majority of the past 13 months.
That decline coincides with the tightening of monetary policy, which supports the notion that the Fed will soon begin to take its foot off its brake on the economy.
Read more of RSM’s insights on manufacturing and the middle market.
Finally, on a brighter note, capital expenditure by manufacturing firms picked up again in January. All five regions reported increased investments in productivity, with dramatic jumps in New York and Philadelphia.
While capital expenditure appears to have returned to neutral after months of expansion, that in itself suggests the ability to support sustained economic growth.
New York
Firms in New York State reported significant drops in business activity for the second straight month. The percentage of firms reporting worsening conditions rose to fifty-four percent in January from thirty-two percent in December.
New orders fell for a fifth time in the last six months to go along with the large decrease in current shipments in January and the declining trend in unfilled orders. Employment and hours worked declined again.
Prices paid moved higher in January but stayed within what looks to be the moderating trend of the past two years.
Despite the decreased activity, nearly 30% of firms reported increased capital expenditures while twenty-seven percent reported increased technology spending, far more than those reporting cuts in spending in either category.
Survey responses were collected between Jan. 3 and January 10.
Philadelphia
Manufacturing activity in the Philadelphia region has been in decline for much of the last year and a half. In the survey conducted Jan. 8 to 15, more than 26% of the firms reported decreased activity, exceeding the 16% reporting increases.
Firms reported a third month of decreased current shipments and new orders while firms reported little change to employment on balance. The moderating trend of price increases continued in January.
In special questions, firms expect moderation of price increases for energy and raw materials, as well as moderation of wage growth in 2024 relative to 2023.
Richmond
Manufacturing activity in the Southeast slowed further in January, the third month of sluggish shipments, sluggish new orders and a notable drop in employment.
The survey by the Federal Reserve Bank of Richmond also indicated further declines in capacity utilization, with about one-third of respondents reporting a decline in capacity utilization since December.
The average growth rates of prices paid and prices received were nearly unchanged in January.
Capital expenditures were flat after a drop in December, while spending on equipment and software was up after three consecutive months of decline.
The survey was released on Jan. 23 and was based on responses from 80 to 87 firms in the District of Columbia, Maryland, North Carolina, South Carolina, Virginia and most of West Virginia. .
Kansas City
Manufacturing activity in Kansas City’s Tenth District declined for the fifth month in a row, with this month’s contraction driven by durable goods, particularly nonmetallic mineral and primary metal manufacturing.
Production and new orders fell sharply while employment stayed mostly flat. Prices paid for raw materials increased sharply relative to last month and this time last year.
Capital expenditures cooled substantially but remained positive as firms choose to hold onto cash, with uncertainty and unfavorable financing listed as deterrents.
Dallas
Texas factory activity contracted in January after stabilizing in December, dropping to its lowest reading since mid-2020.
The new orders index ticked lower, contracting for 20 consecutive months. The capacity utilization index dropped to a multiyear low, and the shipments index continued its 17-month contraction.
The employment index moved down to its lowest reading since mid-2020, with fourteen percent of firms reporting net hiring, while 23 percent noted net layoffs. The hours worked index took a dramatic fall.
Capital expenditure was up for the fourth month in a row.
The survey was collected Jan. 16 to 24, with 92 Texas manufacturers responding.
