Manufacturing sentiment continued to decline in November, according to the RSM US Manufacturing Outlook Index, driven by notable decelerations in the Philadelphia and Dallas regions.
Our measure of manufacturing activity remains at 1.6 standard deviations below normal.
Firms in the New York, Richmond and Kansas City regions reported slight improvements over last month, though they remained at or close to contraction.
The RSM composite measure of manufacturer surveys conducted by five regional central banks indicates that manufacturing activity remains at 1.6 standard deviations below normal.
Although regional month-to-month activity has at times jumped back and forth between expansion and contraction, the composite index has been decelerating for the entire year.
Manufacturing activity typically leads growth of the overall economy, and the yearlong slowdown in manufacturing sentiment denotes risk of a recession.
But the strength of the labor market, the ability of manufacturers to withstand supply chain issues, and continuing investment in productivity suggest a shallow recession and the foundation for a recovery.
Pivot point
It is important to note that sour sentiment because of continued price dislocation and lingering supply chain issues has not derailed overall industrial production, which increased by 3.3% on a year-ago basis through October.
There are several reasons to think this month might mark the pivot point in this cycle.
First, businesses continue to express intentions to expand their workforce, which will increase household income and bolster consumer spending.
Planned hiring, along a pent-up demand for autos and higher defense spending, underscores our forecast that overall manufacturing will increase by 1% next year despite an overall slowdown in the economy.
Second, companies continue to report increased capital expenditures on productivity-enhancing equipment and are reporting improvements in supply chain issues and an easing of prices paid. All of that will help to moderate inflation.
Expect higher defense spending to improve manufacturing conditions and act as an unofficial stimulus next year.
Orders for durable goods increased by 10.7% on a year-ago basis, and the forward-looking proxy for capital goods orders inside the October durable goods report rose by 5.7% on a three-month average annualized basis. At the same time, the shipments of those same goods increased by 5.3% to close out the third quarter.
Third, as those supply chain pressures ease, we can expect a breakout of the backlog in automobile sales, with the knock-on effect of maintaining the recovery of durable goods orders. Although rising interest rates may temper such demand, we are confident that auto sales will remain solid.
And fourth, the Russia-Ukraine war has drained the stock of U.S. weapons. We can expect an increase in defense spending to improve manufacturing conditions.
Although this is something of a wild card in the manufacturing outlook, the replenishing of one part of the American military weapons stock will most likely function as an unofficial stimulus next year. And it would come at a time when policy action to support overall growth through the fiscal channel will be difficult to enact.
But we are confident that an increase in defense spending will be part of the manufacturing and industrial production narrative next year.
New York Fed
Business activity edged slightly higher in New York, according to a survey conducted in the first week of November. The headline general business conditions index was positive for the first time since July, with 33% of firms reporting improved conditions versus 29% reporting deterioration.
New orders decreased slightly, but there was an increase in current shipments and labor market indicators pointed to a solid increase. Input prices increased at about the same pace as last month and selling price increases picked up as well.
Firms expect business conditions to worsen over the next six months but are nevertheless planning modest increases in capital spending and technology spending.
Philadelphia Fed
Manufacturing activity in the Philadelphia Fed region declined to its lowest level of the post-pandemic months, according to the firms responding to a survey conducted in the second week of November.
And while firms continue to express expectations of a contraction over the next six months, there was an improvement relative to the dire predictions of previous reports.
In special questions, expectations for prices received dropped from a 5% yearly growth rate reported in August to 4.8%. Firms continue to expect wage compensation to grow by 5% per year.
Richmond Fed
Some manufacturing firms in the Richmond Fed’s Fifth District continued to report softening conditions, according to a survey released on Nov. 22.
All three of the survey’s component indices were negative, with a slight deterioration reported in shipments and employment while the volume of new orders showed some improvement in November.
Firms reported a notable improvement in wage pressure and continuing supply chain issues, despite dramatic improvements this year.
Local business conditions improved but remained in contraction, with considerably fewer firms pessimistic about conditions over the next six months.
Kansas City Fed
Manufacturing activity in the Kansas City Fed’s Tenth District declined again, according to a survey released on Nov. 17. The slower pace in factory growth was driven by decreased activity in primary metals, plastics and rubber products, chemicals, furniture and fabricated metals manufacturing.
On the positive side, expectations for future activity were mostly flat or slightly positive. The improvement in expectations was evident in firms’ responses to special questions regarding labor conditions.
About 47% of firms expected to increase employment over the next 12 months, 44% of firms expected to leave employment unchanged, while only 8% of firms expected to decrease employment.
About 71% of firms planned to increase employment because the expected growth of sales is high. Other firms noted that employment plans are driven by current staff being overworked or that the firm needs skills not possessed by current staff.
Dallas Fed
Production activity in Texas abated in November, continuing its deceleration. The new orders index plummeted for the sixth consecutive month to its lowest reading since May 2020, capacity utilization worsened and the shipments index posted a second consecutive negative reading.
Labor market measures pointed to slower employment growth. Twenty-two percent of firms noted net hiring, while 16% reported net layoffs, a notable increase from the 9% reporting layoffs in the prior two months.
Price growth eased, while wage growth remained elevated.
Expectations for manufacturing activity were mixed. The future production index remained positive while the future general business activity index remained negative.
The survey was collected from Nov. 14 to Nov. 22.
