Richmond Reversal

In addition to weaker than expected preliminary S&P Global (formerly Markit) PMIs, another weak regional Fed manufacturing index hit the tape this morning.  The Richmond Fed’s Manufacturing Composite dropped into contraction in May as the index hit its lowest level in two years. The 23-point month-over-month drop was also the second-largest decline on record behind the 49-point drop in April 2020.

Richmond Fed Manufacturing Index

Each regional Fed’s headline manufacturing number differs slightly in composition and the Richmond reading is made using shipments, new orders, and employment as inputs.  As shown below, each of those indices experienced historic declines this month causing the massive drop in the composite.  Breadth elsewhere in the report was not much better though. Other categories like capacity utilization, order backlogs, and average workweek also pulled back sharply. Meanwhile, expectations for several categories are in the bottom few percentile of their historical ranges going back to the start of the data in the 1990s. Overall, this month’s report showed a massive slowdown in activity that is consistent with other surveys that have come out this month.

Richmond Fed Report

Two of the inputs to the composite that also fell into contraction this month were new orders and shipments.  New Orders have seen a small handful of larger declines with September of last year being the most recent one.  New Orders were also much lower after that decline last fall.  As for Shipments, the 31-point month-over-month decline ranks as the second-largest on record next to April 2020 when the index fell a whopping 77 points. While it does not necessarily outweigh the rapid deterioration in demand, one silver lining of the report was a further huge improvement in supply chains. The reading on Vendor Lead Times was sliced in half as the index remains below pre-pandemic levels.

Supply Chain Data

Again, Employment is the third input to the composite and it was the sole input to remain in expansion in May. That being said, it too fell sharply versus the prior month.  While that reading indicates lower mid-Atlantic manufacturers are currently net taking on more workers, expectations saw a record decline meaning hiring plans are likely to decelerate significantly in the near future. That is as wage growth has stalled out and the length of the average workweek has been cut.

Labor market data

Finally, in spite of supply chain improvements and weaker demand, prices have continued to rise unabated.  Prices paid hit fresh record highs across both current conditions and expectations.  Prices received are off-peak but the reading did tick up slightly in May. Click here to learn more about Bespoke’s premium stock market research service.

Inflation Data

Shipments Saving Richmond

The Richmond Fed’s manufacturing survey was released this morning showing a modest improvement in conditions in the month of April.  The headline number rose by a point to 14 which is still in the middle of the pandemic range of readings and the highest level since December.

Richmond fed manufacturing

In spite of the improvement in the composite index—a weighted average of shipments, new orders, and employment—the breadth of this month’s report was negative with over half of the categories declining month over month.  Two of those declining categories were new orders and employment which are again inputs for the composite.  That means the higher reading of the composite was entirely thanks to the 8-point increase in shipments.

Looking across other areas of the report, expenditures were weaker while inventories are recovering from historic lows.  While business conditions are mixed to deteriorating, supply chains are showing signs of improvement as evidenced by the increase in shipments.

Richmond fed economic data

While shipments were an area of strength, another input to the composite, new orders, fell 4 points and is back near the middle of its historical range.  Expectations, however, experienced a sizeable rebound with that index rising 9 points.  While that increase bucks the trend of weak expectations readings relative to current conditions that we have seen in other regional Fed surveys (which we discussed in last night’s Closer), this index’s increase was the exception rather than the rule. As shown in the table above, only a handful of other expectations categories rose month over month with many declines ranking in the bottom decile of monthly moves.

The big increase to shipments left that index at the highest level since last July as backlog of orders are growing at a substantially more modest pace compared to earlier in the pandemic.  One likely reason that both of these readings are improving is a coincident improvement in supply chain stress.  The index for lead times saw an 8-point decline ranking in the bottom 5% of all monthly moves. That leaves the index one point above the December low of 35.

Richmond fed economic data

Employment metrics were mixed this month. The region’s firms are still hiring on a net basis, but hiring has peaked and declined again in April.  That was in spite of firms also reporting better availability of workers with in-demand skills as that index rose to the highest level since July 2020. With that being said, the negative number indicates a still insufficient supply of quality talent. Wages, meanwhile, saw one of the larger increases in recent months rising to the highest level since September. The average workweek was unchanged at a healthy level in the top 5% of its historical range, but expectations are calling for declines in hours worked on the horizon.  Click here to learn more about Bespoke’s premium stock market research service.

Richmond Fed economic data