Fears of a Manufacturing Recession Growing


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Factory activity in Texas improved slightly in December, although fears of a manufacturing recession are on the rise as the industry’s growth continues to decelerate.

Last month, the Federal Reserve Bank of Dallas released its Texas Manufacturing Outlook Survey (TMOS), which showed that general perceptions about broader business conditions had worsened over the month, despite an uptick in factory activity.

The modest upswing in Texas manufacturing activity in December was a welcome sign, given that November’s survey marked the sector’s seventh consecutive month of declining activity, data from the Dallas Fed showed.

However, while December results indicated a slight shift in activity, other measures of manufacturing activity showed mixed signals.

For instance, the production index — a key measure of state manufacturing conditions — rose from 8.6 to 9.7 in December, “suggestive of a pickup in output growth,” according to Dallas Fed data.

However, the general business activity index was pushed down further in December, falling from -14.4 to -18.8. This represented the index’s eighth consecutive contraction and the third-worst reading of 2022, per TMOS’ historical data.

“The combination of increased costs of raw ingredients, illiquid consumers, and the need to retain employees via increasing benefits has created a difficult environment. Couple that with the Biden political mentality of things, and it is unhealthy for business,” a food manufacturing respondent said in the survey comments.

Conversely, another respondent from machinery manufacturing commented, “We are seeing more and bigger orders recently. Oil companies are spending money on projects that they have held back on this past year. We expect 2023 to be a very good year. Our backlog of orders is growing to a record.”

The report readings also show consecutive declines in other indexes over the month.

The new orders index was negative for the seventh month in a row — suggesting a continued decrease in demand — though it moved up from -20.9 to -9.2, the report said.

The company outlook index posted its 10th straight negative reading but moved up two points to -12.8, while the outlook uncertainty index fell five points to 15.6, in line with its average reading of 16.6.

The index for capital expenditures (-11.4) and finished goods inventories (-5.5) both turned negative in December, the TMOS results table shows. In contrast, the index for production (+8.9), new orders (+11.7), capacity utilization (+11.9), order growth rate (+10.6), and shipments (+9.4) exhibited positive results over the month.

December’s TMOS goes hand-in-hand with last month’s global manufacturing data.

In December, the S&P Global manufacturing purchasing managers’ index (PMI) fell 15 points, dropping from 47.7 in November to 46.2, the biggest contraction in factory activity since May of 2020, PMI data for the month show.

The PMI is a widely used indicator that helps analysts and economists predict trends in official data series such as gross domestic product, industrial production, employment, and inflation.

The contraction in manufacturing activity was “driven by subdued demand and a faster fall in output,” the report said. Other notable declines were felt in new orders, which declined at their sharpest pace since the 2008-09 financial crisis. This resulted in “a substantial decline in output and subdued demand,” despite price improvements 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,” wrote Chris Williamson, the chief business economist at S&P Global Market Intelligence, in a report.

Data for last month’s TMOS was collected from December 13 to 21 and included responses from 90 Texas-based manufacturers and industry executives. Each industry leader was asked supplemental questions on wages, prices, and outlook concerns.

Firms were asked whether output, employment, orders, prices, and other indicators increased, decreased, or remained unchanged over the previous month, according to the Dallas Fed’s methodology.

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