The Richmond Fed’s business condition surveys saw a dramatic rebound in August after July’s composite release came in at the lowest level since the financial crisis. The composite reading for current manufacturing conditions rose 13 points and came back into positive territory this month. This was thanks to strong breadth among the individual components as two-thirds improved with big pickups in shipments, new orders, backlogs, capacity utilization, local business conditions, equipment spending, and average workweek. Last month also saw half of these components come in with negative readings, but now only five are showing contraction. Notably, the employment component has fallen further after it turned negative last month for the first time since 2016. This is as businesses continue to struggle to find skilled workers.Start a two-week free trial to Bespoke Institutional now to see how the Richmond Fed data impacts our tracking of manufacturing activity across the whole country in The Closer tonight.
While current conditions improved dramatically, expectations six months out actually came in weaker. Only 29% of the components saw an improvement from June as many saw the opposite change from their current condition counterpart. For example, although shipments, new orders, capacity utilization, local conditions, and average work week all saw sizable gains in current conditions, the outlook for these components have simultaneously worsened. Companies are also expecting prices paid and received to fall further. Meanwhile, despite falling rates and the Fed’s cut last month, current conditions for capex remains subdued compared to where it has stood over the past year and expectations are not looking like there will be any pick up either. It is a similar story for equipment and software spending, although current conditions for this component is in better shape.
Looking at the averages of the current and forward-looking components for both the manufacturing and service surveys, business conditions, while not disastrous, have somewhat deteriorated over the past few months. Shipments have fallen for two straight months to the lowest level since last December. New orders are similarly at the lower end of its range, although it did improve marginally for the first time in three months in August. The indices for employment have been the real kicker. This has been nearly cut in half since April even with a small pickup this month. On average, employment indices are at their weakest level since late 2016 while wages have recovered a portion of their recent drop.