For the second consecutive month, the Richmond Federal Reserve Bank said that manufacturing activity contracted in July. The composite index of general business activity fell from -1 in June to -17 in July. Note that historical data have revised due to an update in the seasonal adjustment factors; June’s reading was originally reported to be -3. Even with the change, the drop in July was large, suggesting a dramatic slowing in production in the District. As such, it closely mirrors the pessimistic assessment observed last week from the Philadelphia Federal Reserve Bank.
These weaknesses were seen across-the-board in the various components of the Richmond survey. Respondents indicated contracting levels of new orders, shipments, capacity utilization, and the average workweek. The new orders index, for instance, plummeted from -1 to -25. Net hiring remained only marginally positive, with the employment index falling from 12 to 1. This suggests that net hiring will grind to a near halt in the region, but at least it is not negative.
Part of the reason that employment has not contracted yet might due to the fact that manufacturers continue to be cautiously optimistic about the next six months. But their level of optimism has diminished from previous surveys, with the expected shipments index falling from 29 in May to 16 in June. Other measures had equal drops. Capital expenditures were the lone holdout, with the pace of investments picking up from 18 to 20.
Pricing expectations reflect continued easing, with manufacturers reporting price increases for raw materials of 1.33 percent at the annual rate. It was double that rate just three months ago. At the same time, input prices are expected to grow 2.42 percent over the next six months. This is also lower than prior surveys.
Overall, Richmond area manufacturers are more pessimistic about both current and future economic growth, even as their forward-looking assessments remain cautiously positive. Uncertainties about where the economy is headed, both domestically and abroad, are to blame. This will be particularly acute until policymakers in Washington address fiscal and regulatory concerns leading up to 2013 and until European leaders have adequately dealt with their structural issues.
Chad Moutray is chief economist, National Association of Manufacturers.