Assessing Manufacturing Business Conditions by Firm Size

Fifth District manufacturing activity, as measured by the Richmond Fed manufacturing composite index, has been sluggish over the past few years. To better understand these dynamics, we look at firms' reported performance by size. Specifically, we looked at the diffusion indexes for several metrics. Diffusion indexes are often used to understand if economic activity is improving, declining, or is unchanged. For example, with employee headcount, a positive value means that more firms reported increasing headcount, while a negative value indicates that more firms reported decreasing headcount.

We find that large manufacturers are more likely to report improved activity compared to small and mid-sized firms. Specifically, large firms were more optimistic about local business conditions, employment, shipments, and new orders, and were more able to restructure supply chains to address changes in trade policy.

Large Firms Express More Positive Sentiment

Since 2021, large firms¹ have generally been more optimistic about their local economies. During this period, small and mid-sized manufacturing firms reported somewhat less optimism about their local economies. However, starting in late 2024, sentiment about current local business conditions began to differ between larger and smaller firms — a trend that intensified through 2025. For example, in 2025, the average local business conditions diffusion index — the share of firms that reported improved conditions minus the share that reported deteriorated conditions — was 13 for large manufacturers, indicating that more large firms thought conditions had improved than those who thought that conditions worsened. On the other hand, the index for small and mid-sized manufacturers were -23 and -18, respectively.

Large Manufacturers More Likely to Report Improving Business Metrics

A possible explanation for why small and mid-sized manufacturing firms reported less optimism about local business conditions is a decline in business performance. For example, when we look at the employment diffusion index, we find that mid-sized manufacturers were more likely to report a monthly decline in employment starting in mid-2024. Then in mid-2025, small manufacturers also began reporting decreasing employee headcount. However, larger manufacturers continued to increase employment, as evidenced by a continually positive index for large firms.

Similarly, there was no consistent difference in reported monthly changes in shipments across different firm sizes until 2025 when mid-sized manufacturing firms began to report sharp declines in shipments. Since mid-2025, the shipments index for small and large manufacturing firms has declined. Interestingly, our shipments index across all firm sizes has converged to similar levels in the past month across firm sizes.

Beginning in July 2024, larger firms started to outpace smaller ones in reported changes in new orders. In 2025, the new orders index for large manufacturing firms reached its peak of 30 in March 2025, while small manufacturers reached a peak of 2 in April. Mid-sized manufacturers, on the other hand, never entered positive territory. Although the gap between large and small manufacturers narrowed throughout 2025, it persists. As of September, large manufacturing firms reported a noticeably higher diffusion index compared to small and mid-sized firms.

Large and Small Firms Reacted Differently to Tariffs

In our August 2025 survey, we asked firms about the impact of recent tariffs on their businesses. When asked about the level of uncertainty regarding their input costs, 40 percent of small manufacturers and 57 percent of mid-sized manufacturers reported having no certainty about their input costs. In comparison, only 23 percent of large manufacturers were not at all certain of their input costs.

There were also notable differences in how firms of different sizes responded to tariffs. For instance, 75 percent of small and mid-sized manufacturers planned to increase prices in response to tariffs, compared to 50 percent of large firms. Investment decisions were different, too: Thirty-eight percent of small and mid-sized manufacturing firms delayed capital expenditures due to tariffs, compared to 17 percent of large firms.

Meanwhile, large firms were more likely to revisit their supply chains in response to tariffs. Half of large manufacturing firms sourced new domestic suppliers, compared to 40 percent of small manufacturers and 30 percent of mid-sized manufacturers. Additionally, 42 percent of large manufacturers sourced new international suppliers, a higher percentage than both small and mid-sized manufacturers.

Looking Ahead

Although the number of manufacturers the Richmond Fed survey is small, analysis of our survey data indicates that, in general, larger firms report more positive business outcomes compared to smaller firms. Large manufacturers were more likely to report improvements in local business conditions, employment, shipments, and new orders. Additionally, different sized firms seem to be reacting to recent changes in trade policies differently. For example, larger manufacturing firms responded to tariffs by adjusting their supply chains, whereas smaller firms focused on pricing changes and delaying capital expenditures. As conditions facing our Fifth District manufacturers change, we will continue to ask questions to better understand how will firms evolve to meet today's economy.

Views expressed are those of the author(s) and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.