Fears of a Manufacturing Recession Growing, Dallas Fed Survey Shows

A worker at a newly renovated Ford assembly plant in Chicago, Ill., in 2019. Jim Young/AFP via Getty Images

The latest Federal Reserve Bank of Dallas survey confirmed that activity in the Texas manufacturing sector continued to deteriorate in December.

General business activity in the state’s manufacturing industry plummeted to negative 18.8 last month from negative 14.4 in November, according to the survey, which was released on Dec. 27, 2022. That represented the eighth consecutive contraction and the third-worst reading of 2022.

The report readings, which featured responses from 90 Texas manufacturers, suggested mixed signals. Capital expenditures and finished goods inventories turned negative, while the measure of new orders contracted for the seventh month. On the other hand, the growth rate of the orders index surged by 11 points to negative 9.3, and the capacity utilization index transitioned to positive territory, to 8.5 from negative 3.4. After two straight negative readings, the shipments index edged up by nine points to 1.9.

While there was more robust employment growth and longer workweeks on the labor front, the price and wage indexes were flat.

Overall, the company outlook recorded its 10 straight negative reading with a print of negative 12.8. The outlook uncertainty index tumbled by five points to 15.6. The future general business activity index clocked in at negative 8.3.

Planning for a Recession

Survey respondents’ answers were primarily bearish.

The Thompson Creek Window Co. factory in Landover, Md., on June 8, 2015. Saul Loeb/AFP/Getty Images

One paper manufacturing executive noted that the company is “dialing in the very increased forecast of a significant downturn.”

“Recession is now being planned for and acted upon,” the executive said.

A leader in the business of printing and related support activities conceded that conditions are “slowing down.”

“Estimating activity is really down from previous months, and incoming orders have dropped off as well,” the respondent said.

A survey participant in the computer and electronic product manufacturing base noted a drop in new orders, while inflationary aspects continued to rise, saying that they “are investing in more automation to reduce the labor cost.”

An executive in miscellaneous manufacturing warned that the substantial pace of wage growth is pressuring the company “to outsource manufacturing outside the U.S.”

Looking ahead to this year, industry forecasts were also mixed.

“There is nothing positive in the economic outlook. The Federal Reserve should pause and let prior rate increases filter through before implementing further increases or they [will] overdo the contraction and make it harder to recover,” said an executive in transportation equipment manufacturing.

But executives in machinery manufacturing anticipate that this year would be a strong year, alluding to order backlogs “growing to a record” as oil companies accelerate their spending plans.

Still, according to a food manufacturing executive, “the Biden mentality of things” is helping make it “unhealthy for business.”

US Manufacturing Recession Concerns

The plethora of disappointing manufacturing data has sparked concerns that the sector is on the brink of a recession.

In November, the Institute for Supply Management (ISM) Manufacturing Purchasing Managers’ Index (PMI) fell to 49.0, from 50.2 in October; anything below 50 indicates contraction. Employment levels, new orders, and prices also tumbled last month.

“Managing head counts and total supply chain inventories remain primary goals. Order backlogs, prices, and now lead times are declining rapidly, which should bring buyers and sellers back to the table to refill order books based on 2023 business plans,” Timothy Fiore, chair of the ISM Manufacturing Business Committee, said in a statement.

This month, the S&P Global Manufacturing PMI weakened to 46.2, down from 47.7 in November. New orders plummeted at the first pace since the 2008–09 financial crisis, resulting in a substantial decline in output and subdued demand. However, prices improved amid better supplier delivery times, limited input demand, and lower energy prices.

“If early pandemic lockdowns are excluded, recent months have seen the steepest falls in worldwide export orders and total inflows of new work received by manufacturers since the global financial crisis,” Chris Williamson, chief business economist at S&P Global Market Intelligence, wrote in a report.

Despite the downward trend since April, business confidence was the highest in three months.

Data released from regional central banks have also bolstered recession concerns in the manufacturing sector.

The New York Empire State Manufacturing Index tumbled by 16 points to negative 11.2, in December, worse than the market estimate of negative 1.0. The Federal Reserve Bank of Philadelphia’s Manufacturing Index remained in contraction territory this month, while the Federal Reserve Bank of Kansas’ Manufacturing Index slumped further to negative 13.

One manufacturing executive may have summarized current economic conditions in the Kansas Fed survey.

“We are definitely seeing a decrease in customer demand for almost all our items. December has been extremely slow, and we fear a recession is underway,” the executive said.

The next ISM Manufacturing PMI is expected to dip to 48.5.