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First Cut: Richmond Fed Manufacturing Index plunges to lowest in over 6 years

The Richmond Fed’s Manufacturing Index plunged to -12 in July, it lowest level since -14 in January 2013. The index had managed to remain expansionary after a -3 reading in December 2018 when overall manufacturing activity slowed and rebounded after the end of the partial federal government shutdown in January. However, the three components of the index were all down with falling orders and shipments that have led to cutbacks in hiring.

The Whetstone Analysis calculation of a six-month expectations index based on the manufacturing index components was up to 32 in July after 23 in June which was the lowest since 20 in July 2016. This hints that the weakness in the July manufacturing index may be exaggerated and that firmer conditions will be visible next month in the August report.

The index components were weak across the board in July. New orders suffered a second month in a row of contraction at -18 in July from -2 in June. The index was the lowest since -18 in January 2013. Order backlog — not one of the components — plunged to -26 in July, deepening a series of negative readings begun in December 2018 and leaving little in the pipeline to keep production running.

Shipments fell to -13 in July, its lowest since -18 in December 2018 when manufacturing activity was looking more sluggish and uncertain.

The index for employment fell to -3 in July, the first negative reading since -2 in December 2016 and the lowest since -10 in September 2016. The workweek — also not a component of the index — declined with a reading of -9 in July, its lowest since -9 in January 2013. The subindex for wages dropped to 20 in July from 25 in June and was the lowest since 20 in December 2017. Available workers with the right skills, however, remained in short supply at -19 in July after -18 in June.

The prices paid index accelerated to 3.04 in July after 1.89 and at least in part reflected higher energy prices, although it could also mean that costs along the supply chain are on the rise as well. The prices received index was up to 2.49 in July after 1.88 in June and was the highest since 2.42 in October 2018, suggesting that a little pricing power is returning.

The calculation for the Richmond-ISM equivalent index fell to a rather chilling 48.4 in July after 53.5 in June. The index hasn’t seen a sub-50 reading since 49.8 in September 2016. The Richmond-ISM equivalent has the second strongest correlation with the ISM Manufacturing Index, only slightly softer than that for Philadelphia. Interestingly, the Philadelphia calculation rose 3.9 points to 59.7 in July, its highest in a year. Accurately judging between the two contradictory readings will require more data from the remaining District Bank surveys of manufacturing from the Kansas City Fed at 11:00 ET on Thursday, July 25 and Dallas Fed at 10:30 ET on Monday, July 29.

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