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First Cut: Richmond Composite Manufacturing Index off record low in May, but deep contraction continued

The Richmond Fed Composite Manufacturing Index was off its record low of -53 in April and rose to -27 in May. If the index is still well into contractionary territory, it is starting to look more like readings in a normal recession. The Whetstone Analysis calculation of a six month expectation index brings that up to 8 in May after -12 in April and hints that conditions are anticipated to be nearer recovery in the near future. It is premature to suggest that an improvement could be that near. There are still significant unknowns on the horizon, not the least of which is if reopening some aspects of economic activity will induce another wave of COVID-19 infections that will necessitate another period of stay-at-home directives.

The Richmond index is a weighted average of three components – new orders, shipments, and employment.

New orders remained in contraction at -35 in May from -61 in April and possibly reflected the conversion of some manufacturing facilities to goods deemed essential in a public health emergency. Without more orders, order backlogs have continued to decline with that index at -33 in May after -61 in April. Also, without orders, there is little to ship out. The shipments index lifted to -26 in May from -70 in April but this only suggested that things are not as dire as a month earlier.

The employment index was up to -16 in May from -21 in April, a reading that remained on the path of reduced hiring and increased layoffs. The average workweek continued to contract sharply at -24 in May after -28 in April. The index for wages was -3 in May after 0 in April land pointed to declines for the first time since -3 in March 2010. The available skills index was 4 in May after -37 in April, and the first time the reading indicated that employers were not seeing a shortage of workers with the desired skillsets for the first time since December 2017, and was the highest since 6 in February 2015.

The index for delivery times was a little slower at 21 in May after 28 in April but not enough to change the impression that goods were taking longer to arrive because of limited inventories and at times difficulty in transportation. The inventories index was down to 13 after 19 with factories working down what is on shelves rather than restocking.

The index for prices paid in May was down to 1.05 after 1.48 in April. Declines in energy prices have reduced costs but the trend lower seems to have begun to reverse. Prices received were up to 1.11 in May after 0.92 in April. The increase may reflect some necessary passing on of costs for some inputs but pricing power remained limited.

The Richmond-ISM equivalent index for May was up to 45.7 after 39.5 in the prior month. The Richmond calculation has the best correlation (0.833) with the ISM number among the five District Bank surveys of manufacturing. This was of a piece with the other three reports available for May. It indicates that the ISM Manufacturing Index may well rise a bit from the 41.5 in April when the data is released at 10:00 ET on Monday, June 1.

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