Question of the Day

When Atlanta Fed president Dennis Lockhart spoke yesterday of momentum and the possibility of April rate hikes, did he have advance notice of the Richmond Fed manufacturing data released today?

I ask because today the Richmond region manufacturing index had the biggest change in 23 years of reporting.

The Richmond Fed diffusion index reading of +22 blew well past the Econoday Consensus estimate 0. This was the biggest surge in 23 years, to the highest reading since 2010.


Small sample sizes are the norm for anecdotal reports on the manufacturing sector, a factor that often leads to volatility as is evident in the Richmond Fed index for March which, at plus 22, has bolted out of the negative column with a fury. This is the strongest reading since April 2010 and shows the greatest month-to-month change in the report’s 23 years of data.

New orders are surging, up 30 points in the month to 24 with backlog orders up 15 points and back in the positive column, though just barely at 1. Shipments are up 38 points to 27, capacity utilization is up 22 points to 17 and the workweek is up 11 points to 16. Wages, in a positive indication for inflation, are up 10 points to 20, though both input costs and selling prices remain subdued. Hiring is steady and solid at 11.

One regional report is only one regional report and one month is only one month, but this report does confirm the strength in last week’s Empire State and Philly Fed reports and, unlike this morning’s manufacturing PMI, points to new momentum for the manufacturing sector, momentum that may raise talk of easing headwinds from exports and energy equipment.

Recent History

The Empire State and Philly Fed reports both ended long runs of contraction with positive indications for March, yet positives are not expected for the Richmond Fed’s manufacturing index which is expected to come in at zero to indicate no change relative to February. Richmond had been holding up better than other regional reports but it did slide in February, to minus 4 with both new orders and backlog orders moving into contraction.

Richmond Fed Manufacturing Index

Richmond Fed 2016-03-22

The above chart from the Richmond Fed Survey.

Bubbly Expectations

Looking ahead to the next six months, manufacturers were bubbling over with enthusiasm.

Manufacturers anticipated robust business conditions during the next six months. Firms expected faster growth in shipments and in new orders in the six months ahead. Additionally, survey participants looked for increased capacity utilization and expected order backlogs to grow. Producers looked for vendor lead times to lengthen modestly.

Survey participants’ outlook for the months ahead also included faster growth in average wages and the average workweek, with a pickup in hiring during the next six months. Over the next six months, manufacturers expected faster growth in prices paid and received.

What’s Going On?

That was a surprisingly benign amount of cheerleading from Bloomberg in light of the numbers.

As I said with the other manufacturing reports that went into positive territory, a snap-back of some sort was going to happen at some point.

Let’s not get overly excited. There are two problems of which Bloomberg mentioned one.

  1. Small Sample Sizes
  2. Diffusion Index Characteristics

The first is obvious. The second pertains to the quality inherent in simple yes-no questions.

For example, companies are asked whether or not orders are up. If they were down by 1,000 last month, and up by 3 this month, that counts as an increase.

Secondly, a tiny firm with an increase in three orders offsets a larger firm with a decrease in 500 orders.

Orders are in dollars, not numbers, I am just providing an easy to understand example.

The strength of the manufacturing rebound, if any rebound at all, is certainly in question.

Manufacturer’s expectations typically a strong contrarian indicator.

For more on Atlanta Fed president Dennis Lockhart’s expectations, please see Kaleidoscope Eyes. Lockhart gave a speech yesterday with a similar name.

Mike “Mish” Shedlock