Richmond Fed Manufacturing Composite: Activity Pulled Back In April And Expectations Waned

by: Doug Short

In the past I haven't routinely followed the regional manufacturing indexes, but as a resident of the Fifth District, this is one I pay attention to. The Fifth District includes Virginia, Maryland, the Carolinas, the District of Columbia and most of West Virginia. The Federal Reserve Bank of Richmond is the region's connection to nation's Central Bank.

The complete data series behind today's Richmond Fed manufacturing report (available here), which dates from November 1993. The chart below illustrates the 21st century behavior of the diffusion index that summarizes the individual components.

Tuesday the manufacturing composite slipped into contraction territory at -6, down from 3 last month, which was a decline from 6 the month before. Because of its highly volatile nature of this index, I like to include a 3-month moving average to facilitate the identification of trends (now at 1.0).

Here is the Richmond Fed's overview.

Manufacturing activity in the central Atlantic region pulled back in April after growing at a slower pace in March, according to the Richmond Fed's latest survey. The index of overall activity landed in negative territory, driven by weak readings for factory shipments and volume of new orders. Employment, however, remained in positive territory but grew at a pace below March's rate. Other indicators also suggested weaker activity. Capacity utilization and backlogs fell further, while the gauge for delivery times was unchanged. In addition, inventories grew at a slightly slower rate.

Looking forward, manufacturers in April were less optimistic about their future business prospects. An increasing number of contacts anticipated slower growth across the board for all indicators of activity six months from now.

Survey participants indicated that raw materials prices grew on par with March's pace, while finished goods prices grew at a slower rate than a month ago. Over the next six months, however, respondents expected both raw materials and finished goods prices to grow at a slightly quicker rate than they had anticipated last month.

How representative is this mid-Atlantic region to the larger economy? I calculated the correlation between the Richmond Fed Manufacturing Composite and the ISM PMI Composite Index, which I reported on earlier this month here. It is an impressive 0.82. Is today's Richmond composite a clue of what to expect in the next PMI composite? We'll find out when the next Manufacturing ISM Report on Business is released on May 1st.

Here is a snapshot of the complete Richmond Fed Manufacturing Composite series.

At the national level, the next key indicator I'll be studying as a clue for our current economic health will be posted on Monday, April 29th. It's the Personal Income data in the next Personal Income and Outlays report from the Bureau of Economic Analysis, one of the Big Four Indicators I regularly follow. Meanwhile, Tuesday's Richmond Fed data is flashing a warning, one that is probably not surprising given the expected impact of sequestration on the region. However, the high volatility of this series suggests that we should take the data for any individual month with the proverbial grain of salt.