While the preliminary reading on US manufacturing from Markit released this morning showed activity grew at an accelerated pace in February, the Richmond Fed’s reading was yet another regional Fed indicator showing a deceleration in activity. The headline number was forecasted to rise two points to 10 but instead fell to a barely expansionary reading of 1.
Given the decline, breadth was weak this month with most categories falling month over month including a handful of dramatic declines from indices like Shipments and Capacity Utilization. While the composite reading remains in expansion, there were five categories that fell from expansionary to contractionary readings.
Although there was a material deterioration in current condition indices, expectations have held up remarkably well. In fact, most of these indices were higher month over month with many remaining in or moving into the top decile of historical readings. To illustrate, in the chart below we show the average spread across each category’s index for current conditions and expectations. Historically, expectations indices tend to have higher readings than current conditions, but currently, that reading is right around -16 which is the lowest reading (meaning expectations are higher than current conditions to the widest degree) since the spring of 2020. Prior to that, only the fall of 2015 has seen as low of a reading. Not only are the levels of these indices historically disconnected, but the month-over-month change in this average spread has also been one of the biggest drops on record.
Shipments was one of the worst categories in this month’s report having fallen from a healthy upper quartile reading of 14 all the way down to -11 which is in the bottom decile of all months on record and the third-largest m/m decline on record. In spite of that, expectations hit a new high of 48 and now are at the most elevated reading since July 2020. Albeit the readings and moves were less historic, other demand-related indices like New Orders and Backlog of Orders similarly fell into contraction after sizable declines even as expectations rose to recent highs. As for supply chains, this month showed an improvement as the index for Vendor Lead Times fell to a still elevated, but improved reading of 45.
The employment picture was a bit mixed in the month of February. While hiring increased with the index for Number of Employees recovering much of the January drop, wages grew at a slower rate and the average workweek fell into contraction for the first time since May 2020. The index for Availability of Skills was also improved and is now in the middle of its post-pandemic range.
Expenditures were another particularly interesting area of the report. Across these categories, there was a significant uptick this month with Equipment and Software Expenditure hitting a new record high and expectations for the category experiencing a record month over month gain and leaving it just shy of a record high. Click here to view Bespoke’s premium membership options.
