Richmond Fed -- Another Bad Month

The Richmond Fed issued this report on January 23. Because I was traveling I missed it and am now playing catch-up/.

From the Richmond Fed

Manufacturing activity in the central Atlantic region contracted again in January, according to the Richmond Fed’s latest survey. Respondents reported further declines in factory shipments and new orders, although employment and order backlogs declined on pace with December. Capacity utilization moved slightly lower, while delivery times edged higher. In addition, manufacturers reported somewhat quicker growth in finished goods inventories.

This chart is not good -- it shows the Richmond Federal Reserve District had another bad month and has been contracting for the better part of 2006. On the good side, the overall index had similar performance between 2004 - 2005 without a major problem. However, seeing any index drop like this does not raise confidence.

Here are the shipments and new orders indexes. They both show a similar pattern.





We've seen mixed manufacturing news over the past month. While overall industrial production for December increased .4%, the 4th quarter showed an overall decline. The Phily Fed was up moderately, but was nothing to write home about. The Empire State Survey softened a bit. The Kansas Fed index eased as well.

All of these regional reports are pointing to a slowing of overall production in February.

Richmond Fed Index Decreases

From the Richmond Fed

Tenth District manufacturing activity growth continued to edge down in December, while expectations for future factory activity rebounded strongly from the previous month. Most price indexes in the survey declined, with many indexes recording their lowest levels in over a year.

The net percentage of firms reporting month-over-month increases in production in December was 4, down from 6 in November and 9 in October (Tables 1 & 2, Chart). Production decelerated at both durable- and nondurable-goods-producing plants. The year-over-year production index also decreased from 35 to 25, a two-year low. On the other hand, the future production index rebounded from 15 to 27 after four straight months of decline. Although sample sizes make it difficult to draw firm conclusions about individual states, the data available suggest that production remained well above year-ago levels in all district states.

Here is a chart of the overall diffusion index:



This report is consistent with other Fed area manufacturing reports this month. The general consensus seems to be the current slowdown is temporary. Everyone is expecting orders to pick-up in six months. For example, 49% of respondents think production will increase in 6 months and 50% of respondents think shipments will increase in 6 months. On the inflation expectation front, only 29% of respondents think the prices they receive will increase in 6 months, although 44% think raw material's prices will increase in six months. This may partially explain why only 34% of respondents think they will have more employees in six months. Cutting back on hiring will allow manufacturers to maintain current margins.

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.