After a brief stint in positive territory, manufacturing in the Richmond Fed region is back in contraction.  The Econoday consensus estimate was for +2, the same as last month, but the report reading came in at -4, below any economist’s guess.

Highlights

It has been a very weak month for manufacturing data with now the Richmond Fed, which has been showing more strength than other regions, reporting contraction in February at a headline index of minus 4. Both new orders and backlog orders moved into contraction this month which points to weakness across other readings in next month’s report. Shipments are already in contraction, for a second month, though the workweek is up and employment remains strong, at least for now. Price data are increasingly soft including selling prices which have also been declining in other manufacturing reports.

Recent History

The Empire State and Philly Fed reports have been showing decisive weakness but the Richmond Fed’s manufacturing index, in contrast, has been holding steady. The Econoday consensus is calling for no change in February at an index reading of 2. New orders and backlog orders have been holding in the plus column for this report.

Richmond Fed Report

Let’s tune into the Richmond Fed Manufacturing Report for more details.

Overview

Fifth District manufacturing activity slowed in February, according to the most recent survey by the Federal Reserve Bank of Richmond. Shipments and the volume of new orders decreased modestly this month. Manufacturing hiring continued to increase at a modest pace, while average wages grew mildly and the average workweek lengthened slightly. Prices of raw materials and finished goods rose at a slower pace this month, compared to January.

Despite the current soft conditions, manufacturers remained upbeat about future business conditions. Expectations were for solid growth in shipments and in new orders in the six months ahead. Additionally, firms looked for increased capacity utilization and anticipated rising backlogs. Producers looked for shorter vendor lead times.

Current Activity

Overall, manufacturing activity slowed in February. The composite index softened six points to a reading of -4. Additionally, new orders and shipments decreased this month. The indicators finished at -6 and -11, respectively. Manufacturing employment grew at the same pace as a month ago; the index remained at 9.

Backlogs decreased in February, with the index ending 18 points lower at -14. Capacity utilization also declined this month, pulling the index down to -5. Vendor lead time lengthened slightly, with that indicator gaining two points to end at 6. Finished goods inventories rose at a moderate pace in February; the index lost four- points ending at a reading of 20. Raw materials inventories also rose at a moderate pace, reaching a reading of 36.

Huge Disconnect

New orders and shipments are negative, but raw materials are +36 with finished goods inventories at a reading of +20.

Inventories are at a huge disconnect to reality. Manufacturing optimism is totally unwarranted.

Mike “Mish” Shedlock