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First Cut: Richmond Fed Manufacturing Composite Index declines in December

The Richmond Fed’s Manufacturing Composite Index fell to -5 in December after -1 in November, settling into negative territory for a second month in a row after struggling to maintain growth since the middle of 2019.  The Richmond District has a large and diverse manufacturing sector. The index is in line with the national activity for mildly recessionary conditions. However, the Whetstone Analysis calculation of a six month expectation index points to steady and modest expansion in the outlook at 27 in December after 26 in November.

The three index components saw a deepening of the decline in new orders at -13 in December after -3 in November. The contraction in order backlogs — not an index component — was unchanged at -11. The index for shipments was down to -6 after -2. However, the employment index rose a bit to 7 in December after 5 in November, a small gain that does not change that hiring has slowed significantly.

Wages increased slightly along with payrolls at 29 after 24 in the prior month, consistent with the severe lack of workers to hire with the available skills where the index held at -18 in December. The average workweek contracted sharply to -15 after 3 in November, the lowest since -24 in April 2009. This may represent a reset at the start of the winter months and upcoming holidays, and adjustment to slow conditions in overall manufacturing.

Delivery times widened a little to 6 in December from 1 in November, probably reflecting the narrowness of supplier inventories and the modestly longer time to fill orders as a result. The inventory index rose to 22 in December after 15 in November. It is difficult to tell if this reflects an unwanted accumulation or if there is some restocking going on. In either case, it is probable businesses will slow the pace next month.

The prices paid index got a modest boost from higher energy prices for December with the index up to 1.73 after 1.55. Prices received, however, declined to 1.60 after 1.80. Overall commodities costs are not showing much upward pressure, while businesses are having trouble passing on higher costs where they occur.

The Richmond-ISM equivalent index — computed from the five components most like the ISM Manufacturing Index — was unchanged at 51.6 in December from November. The Richmond equivalent tracks the ISM measure well and suggests that when the Manufacturing Index is released at 10:00 ET on Friday, January 3, it will be close to the 48.1 reported for November.

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