Regional Fed Manufacturing Surveys continue to spell trouble

This morning, the Federal Reserve Bank of Kansas City reported that manufacturing activity in their district fell in March to its worst level since the 2020 pandemic-induced recession  (yellow line in chart below). Kansas City is far from alone in experiencing a slowdown in manufacturing, as four of the five regional Fed manufacturing surveys are currently in contraction (readings below zero). While the breadth of the surveys in contraction is concerning, the depths to which they’ve fallen is more worrisome…

As shown in the graph below, since 2000 the U.S. has never avoided a recession when over 60% of regional Fed manufacturing surveys have seen readings of -10 or worse in the same month. Currently, 80% of these surveys are at or below this dismal level.

While some on Wall Street believe the Fed can execute a soft landing, the manufacturing data is sending a far more cautionary message. Survey respondents continue to indicate that a shortage of labor, inflation, and falling customer demand all remain major challenges. As stated by a respondent to the Kansas City survey:

We need an incentive for people to work. We have 10% increases or more in the cost of materials. We have 7% increases in cost of labor when available. We have raised prices 5% – can’t do more. Hard to make money this way.

If these challenges persist, the U.S. economy may be headed into –not out of– the economic storm.

Eli Petropoulos, CFA – Sr. Market Analyst