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First Cut: Richmond Fed Manufacturing Composite Index in contractionary territory for a second month

The Richmond Fed’s Manufacturing Composite Index rose to -2 in January after -8 in December. The partial retracing of the plunge from 14 in November left the reading reflecting continued weak conditions for a second month. The index components showed shipments still contracting (-8 versus -25), new orders even lower (-11 after -9), but employment on the rise (19 after 14). This suggests that survey respondents for the factory sector view the weakness as temporary – and possibly related to the government shutdown — or at least that present payrolls will be insufficient to meet demand in the near term. In addition to hiring, upward pressure on wages remained (31 in January, unchanged from December) and the workweek was stable (3 in January, unchanged from December).

Prices paid were down a bit (3.32 in January from 4.36 in December) while prices received remained about on trend (unchanged at 2.26 in January). Declines in energy commodities have taken some of the upward pressure off input costs but businesses are still playing catch-up on adjusting prices for earlier higher costs related to the supply chain after tariffs limited supplies and increased prices.

Compared to the New York and Philadelphia surveys of manufacturing, the headline presents a mixed picture. The New York general business conditions index was down, but still expanding (3.9 in January versus 11.5 in December, the Philadelphia general business conditions index was expanding at a faster pace (17.0 versus 9.1), and now Richmond is contracting, if more slowly.

The Richmond equivalent index to the ISM Manufacturing Index was unchanged at 50.7 in January from December. It and the Philadelphia equivalent index have the best correlation to the ISM number (0.859 and 0.838, respectively). The Philadelphia equivalent was little changed at 54.8 in January from 55.3 in December. This suggests that the ISM January index may be nearly flat from the 54.1 in December when it is reported at 10:00 ET on Friday, February 1.

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