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First Cut: October Richmond Fed Manufacturing Index rebounds into positive territory

The Richmond Fed’s Composite Manufacturing Index rebounded to 8 in October after -9 in September to its highest reading since 9 in April. Although the return to modest expansion is good news and an upside surprise from market estimates, it comes amid uncertainty for the factory sector. It is consistent only with the inconsistency of the performance of the index for much of the past year. The Whetstone Analysis calculation of a six-month expectations index brought that up to 27 in October after 18 in September and its highest in four months. This index has been fluctuating as well. It would take more than a one-month increase to suggest that the region’s factory sector was settling back into a trend of modest expansion.

The overall index was up for all three components. The index for new orders was significantly stronger at 7 in October after -14 in September. Shipments were up to 4 after -14. The employment index firmed to 13 after 3. With more orders in the pipeline, the subindexes for backlogs improved to 6 after -11 and the workweek expanded to 10 after -10.

On the employment front, increases in wages slowed to 15 from 24 in September, and was the lowest since 11 in June 2017. The lack of workers with available skills remained a factor, but less so with the index rising to -6 in October after -8 in the prior month.

Delivery times narrowed to -3 in October after 7 in September and was the first negative since -2 in November 2015. Finished goods inventories were at 5 after 13 in September and the first time in the single digits since January when the economic slowdown first caused businesses to take corrective action to ensure inventories did not accumulate unnecessarily.

The prices paid index slipped to 2.40 in October from 2.68 in September, in part on lower energy costs. Prices received moderated to 1.71 from 2.59 and hinted that businesses have less and less pricing power.

The Richmond-ISM equivalent index rose to 52.6 in October from 49.5 in September. The Richmond calculation does have a solid correlation with the ISM Manufacturing Index. However, when the ISM data is released at 10:00 ET on Friday, November 1, it is likely the index won’t crest the 50-mark, only firm a bit from the 47.8 in September.

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