Richmond Fed Index Indicates Sharp Manufacturing Decline in December

Highlights

• Composite index drops to -11 in December
• Shipments, orders, and employment all decline
• Prices rise despite manufacturing slowdown

Manufacturing Activity in Fifth District Declines

December saw a notable slowdown in Fifth District manufacturing activity, as reported by the Federal Reserve Bank of Richmond. The composite manufacturing index, a key indicator of the sector’s health, dropped further into negative territory, moving from -5 in November to -11.

Key Components Show Downturn

Diving into the details, the decrease was driven by significant falls across the board. Shipments plummeted from -8 to -17, new orders declined from -5 to -14, and employment slightly dropped from 0 to -1. These figures paint a picture of a manufacturing sector under pressure, with reduced output and orders affecting employment levels.

Pessimism Among Firms

Reflecting these challenges, local firms expressed a continued pessimistic outlook. Despite a minor uptick, the index for local business conditions stayed negative. This sentiment was echoed in the unchanged future business conditions index, remaining at -5, indicating a lack of confidence in near-term recovery.

Backlogs Decrease, Vendor Lead Times Increase

Most firms reported declining backlogs, continuing a trend of reduced order volumes. However, in a contrasting development, the vendor lead time index turned positive for the first time since June 2022, suggesting a slight easing in supply chain delays.

Prices on the Rise

In terms of pricing, both the average growth rates of prices paid and received by firms saw an uptick in December. This rise in prices, alongside slightly higher expected price changes over the next year, points to increasing cost pressures within the manufacturing sector.

Impact on Broader Economic Indicators

This downturn in manufacturing could have broader implications. Such a slowdown often signals caution, potentially affecting Federal Reserve policy decisions. If manufacturing continues to contract, it could influence Treasury yields and the US Dollar, as markets react to perceived economic weakness. Gold, often seen as a safe haven, could see increased interest, while stock markets might respond negatively to the pessimism in the manufacturing sector.