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RSM US Manufacturing Outlook Index shows a continuing slowdown

REAL ECONOMY BLOG | February 28, 2023


The downturn in manufacturing continued in February, according to the RSM US Manufacturing Outlook Index.

At 1.9 standard deviations below normal, our proprietary index implies a manufacturing sector set to lead the overall economy into a slowdown.

While the overall economy remains resilient, we are growing more concerned about the manufacturing sector.

While the overall economy remains resilient, we are growing more concerned about the manufacturing sector.

Much of this concern has to do with the shift in demand inside the economy from goods to services. But recently we have identified an inventory imbalance in the manufacturing sector.

Our own proprietary data indicates that inventory accumulation through the end of the year continued into the current quarter, and it is likely that spending did not accelerate in a manner consistent with liquidating that increase in stock.

The individual surveys point to a couple of trends that will affect the economy. The first is a slowdown in employment growth and the second comes from the emerging signs of excessive inventory growth.

Both of these are indicative of the winding down of a business cycle. But they need to be taken in the context of manufacturing firms taking out insurance policies on future production.

There is a shortage of workers in the post-pandemic era and the economy has suffered through two years of supply chain issues.

That implies that firms will do their best to hold onto their labor force, resulting in a relatively low level of unemployment even if an economic downturn occurs.

In terms of inventories, manufacturers of durable goods, who have typically carried an inventory-to-sales ratio of 1.6, have increased that ratio to 1.8. That suggests concern over the geopolitical environment and the potential for further supply chain issues.

We note that there have consistently been ups and downs among the surveys conducted by the five regional Federal Reserve banks. And while the Dallas survey turned negative in February and the Kansas City survey turned neutral after four months of contraction, our composite index indicates significantly low levels of manufacturing activity.

RSM US Manufacturing Outlook Index

New York

Current business conditions in New York state continued to worsen according to a survey conducted by the Federal Reserve Bank of New York during the week of Feb. 2 to 9. The survey found that employment levels declined for the first time since early in the pandemic, while the average workweek shortened for a third consecutive month.

There were some improvements, nonetheless. New orders declined modestly, while shipments held steady. And for the third month in a row, firms expect business conditions to improve somewhat over the next six months.

Delivery times shortened, and inventories edged higher during the month. Roughly a quarter of the firms reported inventory increases in February compared to less than 20% reporting decreases. Nearly a third, or 31%, of firms are expecting decreased inventories over the next six months.

Input prices and selling prices increased at a faster pace.

Empire State mfg survey


Manufacturing continued its nine-month decline in the Philadelphia Fed’s region. This was the sixth straight month that firms reported diminished activity, according to surveys conducted during the week of Feb. 6 to 13.

Current shipments remained positive but were low, while new orders were down for the eighth straight month.

With regard to employment, most firms (61%) reported steady employment levels, while 21% reported higher employment in February.

Only 5% of firms reported decreased inventories in February, although nearly a quarter anticipate decreased inventories over the next six months.

Firms continued to indicate overall increases in prices paid and received. The survey’s future indexes continued to suggest tempered expectations for growth over the next six months.

Philadelphia Fed manufacturing survey

Kansas City

Manufacturing activity in the Kansas City Fed’s Tenth District was flat for the second month in a row. February’s decreased activity was attributed to nondurable goods plants, especially plastics, chemical and food manufacturing.

New orders contracted again, but less so than in previous months.

Employment held steady, but expectations for hiring have receded over the course of the year.

Prices paid and delivery times continue to decline, implying a moderation of supply chain issues. And while only 20% of firms reported decreased inventories in February, 30% expect decreases in the coming six months.

The survey was conducted from Feb. 15 to 21 and included 69 responses from plants in Colorado, Kansas, Nebraska, Oklahoma, Wyoming, northern New Mexico and western Missouri.

Kansas City Fed manufacturing survey


Manufacturers in Texas reported a modest contraction in output in February, the first decline in two and a half years. The new orders index dropped again along with the growth rate of orders and capacity utilization. Shipments in the current period remained negative.

Price pressures increased in February and the wages and benefits index inched up and remained well above average. The employment index turned negative for the first time since the pandemic.

The survey of 102 Texas manufacturers was conducted during the week of Feb. 14–22.

Dallas Fed manufacturing survey


Manufacturers in the Richmond Fed’s Fifth District deteriorated further in February. Shipments plunged, new orders remained underwater, employment fell and capacity utilization declined during the month.

Inventories remained expansionary but drifted lower, with expectations for further declines in the coming months.

And in a notable change, equipment and software expenditure turned negative for the first time in two years.

Richmond Fed manufacturing survey

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This article was written by Joseph Brusuelas and originally appeared on 2023-02-28.
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