The RSM US Manufacturing Outlook Index rose for the second month in a row in September as economic conditions continued to improve. The index, which is based on surveys of manufacturing activity and sentiment by regional Federal Reserve banks, came in at 0.7 standard deviations above expectations, up from 0.4 standard deviations recorded in August.
The results stand in contrast to the bottom reached in April, when the coronavirus outbreak took hold. Five months later, the five regional surveys reporting data through September show that sentiment has clearly broken above the downtrend in place since late 2018 (as shown in the figure below).
Does the rebound in sentiment suggest an economic recovery in the making? While the sudden drop in sentiment in April was fully rational, its equally sudden recovery is likely to depend on the containment of the coronavirus, not only domestically, but also among our off-shore trading partners.
The latest data available indicates that manufacturing sales in July were still underwater by 1.2% versus 2019 (as shown in the figure below). The update for August sales will be available on Oct. 9.
Though the positive sentiment in the latest months is not significantly different from normal, its upswing is a step in the right direction, and any increase in manufacturing has too many knock-on effects in the economy to be downplayed.
Finally, the trend in RSM’s manufacturing index closely tracks the widely followed ISM national survey of manufacturing purchasing managers. The ISM index for September will be released on Thursday, with a consensus forecast for manufacturing sentiment to move slightly higher from 56.0 in August – firmly above the index’s neutral point of 50. We show both the RSM and ISM indices in the figure below.
Guide to the RSM US Manufacturing Outlook Index
Six of the 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 RSM US Manufacturing Outlook 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 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.
The table below shows that each of the regional surveys has dropped in value since the peaks reached before the pandemic but have recovered above their medium-term downtrend.
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 survey shows:
- A decline in manufacturers’ sentiment from 2017 through today that coincides with a deceleration in manufacturing sales growth.
- An uptick in manufacturing sales at the end of 2019 and into January and February 2020.
- A sharp drop in the surveys reported in March to May because of the U.S. coronavirus outbreak. Note that the Chicago survey is updated through July.
In the figures below, we are showing the three-month moving averages of the surveys to more easily identify the underlying trend in sentiment.
For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.