The RSM US Manufacturing Outlook Index showed modest improvement over the last month, likely due to a combination of easing oil and energy costs as well as improved external demand despite weaker domestic economic activity. Although current shipments remain robust, new orders moved lower, which implies the prospect of further easing in our topline index consistent with a modest contraction in overall manufacturing sentiment.
Our index is a composite of surveys of current manufacturing activity conducted by five regional Federal Reserve banks. The index compares current activity relative to levels normally encountered in previous years.
July’s reading of 0.6 standard deviations below normal manufacturing conditions marks the third month of sub-standard activity, with one of the regional surveys reporting an outright contraction and four of the five regions reporting below-normal activity.
Whether the stress in the manufacturing sector spreads to the rest of the economy will depend on the impact of the monetary authority’s efforts to squash inflation as well as developments in Europe and their impact on the supply and cost of energy.
Regional results of July surveys of manufacturers
Manufacturing conditions in New York State were once again below average but nevertheless registered improvements over dismal performances in May and June. In a survey conducted July 5-11, 34% of firms reported improved conditions while 23% reported worsening conditions. Shipments and employment remained expansionary, while prices paid and received showed signs of peaking. Most other indicators showed only marginal improvements or moved sideways relative to June.
Pessimism increased, however, and the outlook for the next six months turned negative for only the second time in the survey’s history, the previous episode being at the depths of the Great Recession. Nearly all forward-looking indicators took a turn for the worse, though the employment, capital spending and technology spending indices remained positive. That, in our opinion, suggests a commitment to remaining competitive.
Manufacturing activity in the Philadelphia region fell for the fourth consecutive month, according to a survey taken July 11-18. Although 61% of firms reported no change in activity, only 12% of firms reported increases. And while shipments increased, the index for new orders turned negative.
In other signs that activity might be slowing, the employment index declined to its lowest reading since May 2021 and the average workweek index decreased for the fourth consecutive month. The prices paid index remained elevated but declined for the third consecutive month to its lowest reading since January 2021. Firms’ expectations for activity over the next six months remained negative.
In response to special questions included in the survey, nearly 79% of the firms indicated wages and compensation costs had increased over the past three months and none reported decreases.
Texas factory activity continued its below-average rate of growth in July. While shipments ticked up and capacity utilization was unchanged, new orders deteriorated further, suggesting a further decrease in demand.
Perceptions of broader business conditions in the Dallas Fed area worsened in July to a level reached only three other times—during the Great Recession, the 2015 oil price collapse and earlier in the pandemic.
Prices and wages continued to increase but at a more moderate pace and employment conditions continued to indicate a robust labor market.
In special questions, 62% of firms reported intentions to hire or recall employees. Among impediments to new hiring, 74% reported the lack of available applicants, 52% reported insufficient pay and 41% reported candidates with a lack of competency. Firms reported difficulty hiring for both low-skill and high-skill positions and everyone in between, with more difficulty encountered as skill levels increased.
The survey was conducted the week of July 12–20, with 87 Texas manufacturers responding.
Manufacturing activity rebounded modestly in the Richmond Fed’s Fifth District in July after a dismal report in June. Shipments were positive again, while new orders and capacity utilization improved but remained negative. The number of employees, wages and prices paid receded while remaining elevated. Firms noted an insufficient availability of skills in the labor market.
Inventories and vendor lead times moved toward neutral levels, suggesting another month of improving supply chain conditions. Expectations for the next six months recovered but remained negative. The survey was reported on July 26.
Manufacturing activity in the Kansas City Fed’s Tenth District increased slightly relative to June but remained lower than reported earlier this year. July was the fourth consecutive month of diminished activity, with the index for new orders negative for the second month in a row. Nevertheless, shipments in July increased relative to June and there was a big jump in expectations for activity in the next six months.
Firms reported some relief in price pressures and improvements in delivery times, suggesting improved supply chain conditions. But they also reported difficulty in staffing as a consistent deterrent to expansion. The survey was reported on July 28.