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First Cut: Richmond Fed Manufacturing Index turns negative again in September

The Richmond Fed’s Composite Manufacturing Index for September fell to -9, retreating from the bare positive of 1 in August, and returning to contractionary territory from the -12 in July.  The decrease reflected weakness in new orders and shipments even as employment rose.

The Whetstone Analysis calculation of a future index also pointed to a softening in conditions, slipping to 18 in September from 20 in August, and was the lowest since 18 in July 2016. Although expansion is expected to continue, it is at a far less robust pace than the last year or two.

The details of the report showed that new orders softened after a rebound in the prior month (-14 in September after 2 in August). Order backlogs continued to contract for a tenth straight month, leaving factories to depend on incoming orders for activity.  Capacity utilization was down for a sixth month in a row (-11 after -3). Shipments were sharply lower after firming in in the prior month (-14 after 5).

Vendor lead time was about unchanged month-to-month (7 in September after 6 in August). Finished goods inventories were more-or-less on trend (13 after 10).

The indexes for employment showed expansion in hiring after two months of contraction (3 in September after -6 in August and -3 in July) but remained quite soft. Available workers with the desired skillset remained scare, but less so (-8 after -16) while wages were up solidly (24 after 22). The workweek contracted (-10 after 4). Signs of slower hiring and less scarcity could be a negative for future wage increases.

The index for prices paid was essentially unchanged at 2.68 in September after 2.69 in August, while prices received picked up to 2.59 after 1.66. Lower energy costs appear to have been largely offset by higher prices for other commodities, while increased input costs cannot be fully absorbed and so are being passed on to customers.

The Richmond-ISM equivalent index slipped below the 50-mark to 49.5 for September after briefly rising above it to 51.7 in August. The five components in the Richmond survey closest to the ISM Manufacturing Index have a strong correlation to the national report. This reading suggests that the ISM index may not be able to return to expansion from the 49.1 in August when the report is released at 10:00 ET on Tuesday, October 1.

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