After disappointing readings from the Empire and Philly Fed releases last week, the Richmond Fed provided a sigh of relief for US manufacturing as this morning’s release moved up to 22 versus estimates for an unchanged reading of 18. The four-point increase month over month brings the index into the top 5% of all readings since the survey began in 1993. That indicates the region’s manufacturing sector continued to grow at a historically rapid rate in the month of June.
In spite of the strong headline reading, breadth in the report was actually negative with almost twice as many sub-indices falling month over month versus making a move higher. A huge 17 point jump in New Orders was to thank for the stronger reading in the headline number making up for the broad declines across categories. Although many indices fell versus May, the vast majority remain in expansionary territory. Even those in which that was not the case, like those for Inventories and Availability of Skills, the negative readings are not necessarily signs of weakness either.
As previously mentioned, New Orders ripped higher rising 17 points to 35, the joint highest reading on record alongside the September 1997 reading. As the component with the largest weight (40%), that bolstered the composite reading in a big way more than making up for the declines in Shipments and Number of Employees. Even though New Orders accelerated considerably, Order Backlogs saw a massive deceleration as that index dropped 14 points. Even with that decline, the index is still in the 99th percentile of all months. Although backlogs are growing at a historic pace, shipments have yet to pick up as that index fell 4 points to the lowest level in a year.
As for why shipments are not growing at the same pace as orders, supply chain issues seem to be part of the problem. The Vendor Lead Times index (higher readings indicate longer lead times and vice versa) has backed off of the record high but is still far above any level with historical precedence. In addition to the improvement in current conditions for this category, expectations also saw a massive 18 point decline; ranking as the second-largest month-over-month decline on record behind a 23 point drop last June. That optimism in the improvement in supply chains was also likely the reason for the improvement in optimism for shipments. Diverging from the current conditions index, that optimism reading rose 11 points to the top 2.5% of all readings.
Those long lead times are also impacting inventories which in turn is impacting shipments. Finished Good Inventories are at a record low after falling 11 points MoM while the Raw Material Inventories index bounced, but is also contracting at a rate unparalleled with any other period in the survey’s history. Putting aside the supply chain headwinds, the need to rebuild those inventories should be a positive for growth going forward.
Long lead times, low inventories, and strong demand can only mean one thing: higher prices. Input prices pulled back slightly but are still rising at an unprecedented 9.42% annualized rate. Those higher prices have been passed onto consumers with prices received growing at 5% annualized, though, that is lower than the 5.41% rate last month.
Perhaps the most optimistic area of the report was in regards to employment. While the current conditions index fell, expectations for the Number of Employees index hit a record high in June. That disconnect between actual increases in employment and the desire to hire has to do with a lack of needed workers. The index for Availability of Skills rose 15 points month over month, one of the biggest one-month upticks to date, but that leaves the index well below the past eleven years’ range when the Richmond Fed first began to survey on the topic. Taking action on that lack of labor supply, businesses are raising wages at one of the fastest clips on record, and expectations are not pointing to any slowdown in that trend. Click here to view all of Bespoke’s premium membership options.