A small drop is normal when air starts flowing. A large drop that makes the tool weak means you should look at the regulator, airflow path and compressor capacity.
Check the regulator while the tool is actually running
Static pressure with no airflow can look perfect. Watch the outlet gauge while the tool is operating. Adjust only within the tool’s rated pressure.
Look for restrictions
A long small-diameter hose, tiny quick-connects, kinked hose or clogged inline filter can create a noticeable pressure loss between compressor and tool.
Compare the tool’s airflow demand with compressor SCFM
If the tool consumes more air than the compressor produces, tank pressure will fall during use. The pump may run continuously trying to catch up.
Check for leaks
Every hiss is air the tool does not receive. Couplers, thread joints and damaged hose ends are easy places to lose flow.
Know when the compressor is simply too small
If the airflow path is sound and the tool’s published SCFM requirement is higher than the compressor’s rating at the needed pressure, the clean answer is more compressor capacity, not another regulator.
Sources used for this answer
Back to class: Air Compressor Class.