This has been a durables-led recovery, with employment in the manufacturing sector back to 97% of its pre-pandemic levels. But after a year of rapid growth, there are signs that the buoyancy among manufacturers is ebbing.
After a year of rapid growth, there are signs that the buoyancy among manufacturers is ebbing.
The RSM US Manufacturing Outlook Index, while still elevated, declined in August after peaking in July.
Orders for durable goods slipped in July while remaining $26.3 billion and 11.4% higher than pre-pandemic levels, according to government data recently released.
And sentiment among manufacturers in surveys by regional Federal Reserve banks slipped across the board as the delta variant spread.
Regional Fed surveys
Manufacturers in surveys conducted by regional Federal Reserve banks gave hints of the underlying currents affecting the U.S. economy—rising prices along the supply chain, an aging population, worker dissatisfaction and rising wages.
Surveys of manufacturers in the Philadelphia Fed region suggest continued expansion in August, though indicators for both current and future activity decreased from last month. Firms were expecting increased employment, with a 4% increase in wages and benefit costs. Respondents also noted increases in prices paid for materials, which would be added to output product prices.
Business activity in New York state remained elevated in August, but below last month’s record levels. Indices for both prices paid and received remained at or near record highs. The survey suggested ongoing optimism about future conditions.
Manufacturing conditions in the Richmond Fed region remained expansionary, but declined from last month’s record level. Shipments, new orders and employment decreased but remained positive, although several manufacturers reported deteriorating local business conditions. Overall, the survey suggested that conditions would improve in the next six months.
Of note, 20% of firms surveyed in the Kansas City region reported a recent decrease in activity because of the recent surge in COVID-19 cases. Still, manufacturing activity and expectations for future activity remained positive. Prices paid for raw materials continued to increase for a majority of firms in August, with prices received at record highs.
You can infer the difficulty of finding workers in the responses to special questions in the Kansas City survey. Nearly 60% of firms reported a decrease in applicants per job since May. And more than a quarter of firms reported retirement as a common reason given for workers quitting, with firms also reporting that some workers no longer liked the manufacturing work environment.
The Dallas region reported that factory activity continued to increase in Texas, albeit at a slower pace during August. The labor market indicated continued growth, with pressure on wages and benefits ticking down during the month. Finally, price indices remained at high levels, as did optimism over future developments.
The RSM US Manufacturing Outlook Index
The RSM US Manufacturing Outlook Index is a composite of those surveys conducted by regional Fed banks and is highly correlated with real gross domestic product growth and with nominal and real manufacturing growth.
After an extraordinary 12-month run of positive sentiment in the manufacturing sector, sentiment among the five regional banks reporting in August slipped from 2.0 to 1.0 standard deviations above what would be considered normal levels of manufacturing confidence.
The index rarely goes above 2.0 standard deviations, with most of these brief elevated episodes in the period immediately following a recession; a standard deviation of 1.0 is an exceptional occurrence as well.
Elevated levels in manufacturing should increase the demand for labor, with positive effects on wages, consumer spending and demand in downstream sectors.
Should vaccinations overcome the surge in the delta variant, we expect these high levels of manufacturing confidence to be sustained, with the potential that stimulus spending and technology investment will provide the basis for further manufacturing gains.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.