The downturn in manufacturing in the United States continued in December and January, according to the RSM US Manufacturing Outlook Index.
Our index has now dropped below levels of activity in previous midcycle downturns.
Our index has now dropped below levels of activity in previous midcycle downturns, falling from two standard deviations above normal in the summer of 2021 to nearly two standard deviations below normal in the most recent reading.
This suggests an increased likelihood of a manufacturing recession this year, or the end of a business cycle should growth in the service sector stall out as well. This is in line with our estimation of a 65% probability of a recession this year.
Despite the burst of economic activity to close out last year, it is likely that housing and manufacturing have stalled at best or are in a mild contraction at worst.
It will be a number of months before we see the service sector deteriorate in a similar manner and unemployment increase enough to evaluate whether the broader economy has fallen into recession.
There has been an across-the board decrease in new orders among manufacturers and a cooling of employment growth reported by four of the five regional Federal Reserve banks that conduct surveys of manufacturing activity.
This supports the consensus of slower economic growth in the first two quarters of the year and recessionary conditions in the second half.
Absent further shocks, there are reasons to expect a shallow downturn.
First, as to monetary policy, firms in the surveys continue to report continued investments in productivity-enhancing equipment, improvements in supply chain issues and an easing of prices paid.
All of that should help to moderate the response by the Federal Reserve to inflation, which would tend to support consumer and business spending and create the basis for a recovery in the manufacturing sector.
Second, as to fiscal policy, on Jan. 6, the Department of Defense announced the Biden administration’s commitment to additional security assistance for Ukraine, which includes a drawdown of military equipment valued of $2.85 billion. At some point, that equipment will most likely be replaced.
Just as military spending during the Reagan years supported growth in a slowing economy, we can expect the aid to Ukraine as well as domestic infrastructure projects to improve manufacturing conditions.
For now, however, our composite index has been showing the effects of tighter monetary policy, higher energy costs and the shift to spending on services.
At nearly two standard deviations below normal and based on previous business cycles, that implies an economy waiting to be pushed into recession.
Regional results
Business activity contracted sharply in New York State, according to a survey conducted in the first week of January. Most disconcerting was the plunge in both current shipments and new orders while employment growth stalled.
Firms reported delivery times holding steady and inventories edging higher. Input price increases slowed considerably and selling price increases moderated, all of which suggest some combination of supply chain improvements and moderation in demand.
While firms in the survey said they expected little improvement in business conditions over the next six months, the capital spending index held steady and technology spending increased.
Manufacturing has declined for the fifth straight month in the Philadelphia Fed region. According to a survey conducted in the second week of January, more than 33% of firms reported declines in activity while 24% reported increases. Current shipments increased but new orders declined for the eighth straight month.
A majority of responding firms reported steady employment levels, while 22% reported increased employment against 11% reporting a decline.
Input prices moderated during the month but remain elevated. And in special questions, firms are expecting cost reductions to continue.
Manufacturers in Richmond Fed’s Fifth District reported deterioration in business conditions in January. According to a survey released on Jan. 24, each of its three component indexes—shipments, new orders and employment—declined, with a notable decline in new orders.
Firms indicated a continued easing of supply chain constraints. Order backlogs retreated further, as did vendor lead time and the average growth rates of both prices paid and prices received. Expectations for price growth over the next 12 months also decreased.
Labor market trends continued in January, with a declining number of employees since the middle of last year and a lack of qualified workers but persistent wage growth.
Manufacturing activity was essentially flat in the Kansas City Fed’s Tenth District, according to a survey released Jan. 26. The recent declining trend of recent months was moderated somewhat, with factory growth in January driven more by durable goods plants, especially wood product, machinery and transportation equipment manufacturing.
Prices paid and delivery times continued to decline, implying moderation of supply chain issues, while employment held steady.
The composite index is an average of the production, new orders, employment, supplier delivery time and raw materials inventory indexes.
Production activity in Texas was flat in January, with indicators continuing to suggest decreased demand, according to a survey of 102 Texas manufacturers conducted by the Dallas Fed from Jan. 17 to Jan. 25.
The new orders index was negative for the eighth month in a row, although it moved up from last November’s low point. The growth rate of orders eased, the capacity utilization slipped lower and the shipments index turned negative once again.
Still, labor market measures pointed to stronger employment growth and longer workweeks. Nearly a third, or 31%, of firms noted net hiring, while 13% noted net layoffs.
Price pressures were generally steady and wage growth eased slightly in January.
