Richmond Fed Manufacturing: The February Slowdown

Includes: DIA, IWM, QQQ, SPY
by: Doug Short

As a resident of the Fifth District, this is a regional manufacturing index I pay close 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 the nation's Central Bank.

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

The February update shows the manufacturing composite at -6, which is a dramatic decline from last month's 12. Not surprisingly, the full report mentions bad weather as a factor. However,, despite the weather, had forecast 13. Because of the highly volatile nature of this index, I like to include a 3-month moving average, now at 6.3, to facilitate the identification of trends.

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

Click to enlarge

Here is the latest Richmond Fed manufacturing overview.

Manufacturing in the Fifth District slowed, according to the most recent survey by the Federal Reserve Bank of Richmond. Shipments and the volume of new orders declined. Hiring flattened, while the average workweek shortened and average wage growth rose. The backlog of orders declined and vendor lead time remained flat in February, as capacity utilization lost traction.

Manufacturers were less optimistic about their future business conditions than they were a month ago. Firms anticipated slower growth in shipments and new orders. Additionally, producers looked for flat backlogs and slower growth in capacity utilization. Survey participants expected the number of employees and wages to grow on pace with last month’s outlook, with slower growth in the average workweek. Expectations were for vendor lead time to remain unchanged.

Raw materials and finished goods prices rose at a slower pace in February compared to last month. Manufacturers expected faster growth in prices paid and prices received over the next six months compared to last month’s predictions.

Here is a somewhat closer look at the index since the turn of the century.

Click to enlarge

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 March 3rd.

Because of the high volatility of this series, we should take the data for any individual month with the proverbial grain of salt.