While the U.S. economy surprised many observers in 2023 with its resiliency amid cooling inflation, the story for the manufacturing sector was less pleasant. As one Michigan manufacturer succinctly put it: “Tough year!”

Activity decreased last year for Ninth District manufacturers, according to a survey conducted by the Federal Reserve Bank of Minneapolis and the Minnesota Department of Employment and Economic Development in November and early December. However, those same survey respondents have optimistic outlooks for their firms in 2024.

The survey results reflect responses from more than 400 manufacturing operations of various sizes, randomly sampled across district states. Most survey results can be summarized as an index representing changes in activity over the previous year and expectations for the coming year, in which values greater than 50 indicate expansion and values below 50 indicate contraction (see Figure 1).

Half of respondents reported that orders from customers decreased in 2023, compared with 29 percent who saw increased orders. Production levels, productivity, and exports decreased as well, though only slightly on balance, and most respondents reported no change. One of the only indicators to expand was investment in plant and equipment, with a slightly higher share reporting an increase in capital spending than those who reported a decrease.

A strong majority of manufacturers indicated they increased the prices charged for their products from a year ago, which is no surprise given elevated inflation rates. However, profits fell on balance, indicating that lower demand and higher input costs outweighed increased prices.

In keeping with contracting activity, employment declined slightly, with 29 percent reporting decreased headcount versus 21 percent who saw an increase. Survey comments indicated that continued, limited labor availability restrained hiring, and 42 percent of firms indicated that labor availability had decreased. Wage pressures also remained elevated. Almost half of manufacturers reported raising wages by 3 percent to 5 percent in 2023, while 30 percent of them increased wages by more than that.

Despite a down year, expectations for 2024 call for a modest rebound. Manufacturers overall anticipate growth in most indicators in the coming year, including production levels and productivity, though a substantial share expect unchanged levels. The outlook for capital spending was roughly flat, and profits are expected to decrease on net.

Prospects for demand are more mixed but positive on balance. A third of manufacturers expect increased orders this year, slightly greater than the share who expect them to decrease. The outlook for prices remains elevated, as 42 percent of respondents expect to raise their selling prices further compared with only 12 percent who see them decreasing.

Firms expect tight labor market conditions to persist, as 61 percent forecast no change in worker availability. A slightly higher proportion of respondents plan to add to their workforces in 2024 than those who anticipate layoffs, though the majority of respondents expect no change. On average, wages and benefits are expected to increase at a slower pace than last year.

In contrast to the positive outlook among manufacturers for their own operations, expectations for state economies in 2024 are pessimistic. The negative outlook might be due in part to credit conditions, as firms reported they expect current interest rates to have a negative effect on their investment, hiring, savings, and inventory in the year ahead (see Figure 2).

District manufacturers expect state employment, business investment, consumer spending, economic growth, and corporate profits to contract over the next 12 months. Inflation remains the largest concern, with more than half of respondents predicting an increase in the coming year.