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First Cut: Richmond Fed composite manufacturing index dives in February

The Richmond Fed’s Composite Manufacturing Index dived in February to -2, nearly reversing the rise to 20 in January. The plunge throws some cold water on expectations that conditions in manufacturing were warming up at the start of 2020. The fundamentals for the District’s factory sector probably lie in the mid-ground of the two months, but the volatility is unsettling when other District Bank surveys of manufacturing have pointed to more stable and modestly expansionary conditions in January and February.

The Whetstone Analysis calculation of a six-months expectations index also had a decline, but a much less severe one. The reading was at 28 in February after 33 in January and was more-or-less on the broad trend of recent months.

The Richmond index reflected declines in all three components. Shipments dropped off to 1 in February after 29 in January and employment dipped to 8 after 20. New orders left expansionary territory at -10 in February after 13 in January. The big swings for shipments and orders also suggest that it may be better to take the two months together, while employment is actually behaving more in line with recent months.

Altogether, I would be cautious about overreacting to the Richmond report’s unexpected retreat. One month’s data is not a trend which means that the pop higher to 20 in January was not the harbinger of a rebound in manufacturing in the District. In fact, the -2 of February is more in line with recent conditions. It might also be due to the first wave of impacts along the supply chain and for orders related to the COVID-19 quarantines in China.

In any case, with the orders index down sharply and the index for backlogs back in contraction at -6 in February after rising to 9 in January, activity  in the factory sector will be spottier and shipments slower in coming months.

Employment is still expanding, if more slowly, and the workweek is slower as well at -4 in February after 7 in January. Workers with available skills are still scanty at -35 after -26 in the prior month, as a consequences of which wages were rising more quickly at 26 in February after 21 in January.

Delivery times widened a bit to 11 in February from 9 in January, but not enough to suggest bottlenecks are building. Inventories were down to 21 after 28, at levels consistent with caution regarding accumulating unwanted goods.

Prices paid dipped to 1.95 in February from 1.21 in the prior month on declines in energy costs. Prices received were up a bit to 1.54 after 1.31, indicating some mild pricing power is present.

The Richmond-ISM equivalent index fell to 53.1 in February from 59.9 in January. Although the calculation has the best correlation among the five District Bank surveys (0.833) it probably overstates the potential for the ISM Manufacturing Index to decline from the 50.9 in January when that report is released at 10:00 ET on Monday, March 2.


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