Tuesday, December 26, 2006

Richmond Fed Slows

From the Richmond Federal Reserve

In December, the seasonally adjusted manufacturing index—our broadest measure of manufacturing activity—decreased to -6 from November’s reading of 7. Among the index’s components, shipments lost ten points to -4, new orders fell fourteen points to -8 and the jobs index moved down fifteen points to -5.

Other indicators also suggested weaker activity. The capacity utilization index turned negative, losing twelve points to finish at -11 and the orders backlogs indicator shed five points to -16. Vendor delivery times edged down three points to -1, while our gauge for raw materials inventories was somewhat higher, gaining six points to 20. The finished goods inventories index, however, trimmed three points to 12.

Both raw materials and finished goods prices grew at a quicker pace in December. Looking ahead, respondents expected raw materials prices to rise faster over the next six months.

The overall index -- along with various individual components -- decreased at the end of 2004 and early 2005. In other words, this might be a year-end slowdown and nothing more. However, the overall economic environment was far different at the end of 2004. Over the last year we have had a slowing housing market, a record trade deficit and slowing (although fairly respectable) employment growth.

The three-month average of the new orders index, overall manufacturing activity and shipments has decreased for the last 6 months. This indicates the slowdown could be a natural situation where manufacturing customers made a large number of purchases six months ago and are now working off the inventory from those purchases. However -- as with the previous statement -- the overall economy situation right now is one of a general slowdown.

Fed watchers -- bear witness to the increased prices paid and prices charged numbers. These indicate the PPI from December may not be a fluke.

The Richmond Fed also released a services report today

According to the latest survey by the Federal Reserve Bank of Richmond, revenue growth in the broad service sector slowed in December. Retail sales contracted slightly in December, although sales results from the final weekend before Christmas are not included in this month's survey. Big-ticket sales led the decline in December, but the pace moderated from that of a month ago. Retail inventories fell for the first time in six months, though the contraction was mild. Shopper traffic also slipped, and retailers were less optimistic about sales expectations for the first half of 2007. In contrast, contacts at service-producing firms said revenues grew at a faster pace in December, and they continued to have a bright outlook for the next six months.

The fact that the last weekend before Christmas isn't included makes this survey very suspect in my opinion. Holiday sales have become more and more a last-minute activity over the last few years.