Richmond Manufacturing Activity Continues to Contract; Consumer Confidence Drops

By August 28, 2012Energy

The Richmond Federal Reserve Bank reported that manufacturing activity contracted in its region for the third consecutive month. With that said, the pace of the contraction has eased somewhat, with the composite index of general business activity improving from -17 in July to -9 in August.

This mirrors a similar movement observed in yesterday’s Dallas Fed survey. The U.S. economy remains soft, with manufacturers uneasy regarding the current environment and less confident of gains in the coming months.

A sharp drop in new orders helped to diminish manufacturing activity in August, with the volume of new orders only improving slightly from -25 to -20. The subcomponents of this index were weak across-the-board, including contracting levels of capacity utilization, employment, and the average workweek. Net job creation turned negative this month – something that stands in contrast to some of the other regional surveys, such as the one from Texas. On the other hand, shipments of manufactured goods moved from a significant contraction last month to a slight gain this time.

Even with the more downbeat assessment of the existing state of the economy, manufacturers remain cautiously optimistic about the next six months; however, their level of positivity has definitely diminished in the past couple months. The forward-looking index for new orders was 17 in August, or nearly half of the 29 observed in June.   While expected capacity utilization is anticipated to expand, the pace of employment and capital spending growth has definitely been impacted.

On the positive side, pricing expectations reflect the easing seen over the past few months. Manufacturers report price increases for raw materials of 1.32 percent, or roughly the same rate as last month. This is about half of the pace experienced just four months ago. At the same time, input prices are expected to grow 2.78 percent over the next six months, an uptick from the 2.42 percent noted in the previous survey.

Meanwhile, just as manufacturers have grown more anxious, so have consumers. The Conference Board found that consumer confidence fell, down from 65.4 in July to 60.6 in August. the lowest level since November. The decline was the result of increased worries about the future state of the economy, with the expectations component dropping from 78.4 to 70.5. Given the now-constant discussion about the fiscal cliff and economic challenges moving into 2013, this decrease should not be a surprise. Americans did not alter their view of the current economic environment from last month.

Individuals have become more concerned about employment and income prospects. The percentage of respondents saying that jobs were plentiful dropped from 7.8 percent in July to 7.0 in August.

Nearly 41 percent suggested that jobs were “hard to get.” At the same time, the percentage of those expecting income to decrease has risen steadily throughout the course of the past six months, up from 13 percent in February to 16.8 percent in August. The percentage stating that income should increase has remained relatively constant over that time frame at around 15.5 to 15.7 percent.

Consumers’ buying plans were mixed in August. Those intending to purchase an auto dropped from 14.3 percent in July to 11.6 percent in August. The motor vehicle sector has been a larger driver of recent growth, helping to boost July’s durable goods orders, for instance. So, any decline could have significant impacts on the larger economy. Nonetheless, the Conference Board also suggests that home buying plans have increased, up from 4.6 to 5.3 percent. This is good news for increasing slow-but-steady gains in the still-depressed housing sector.

Chad Moutray is chief economist, National Association of Manufacturers.

Chad Moutray

Chad Moutray

Chad Moutray is chief economist for the National Association of Manufacturers (NAM), where he serves as the NAM’s economic forecaster and spokesperson on economic issues. He frequently comments on current economic conditions for manufacturers through professional presentations and media interviews. He has appeared on Bloomberg, CNBC, C-SPAN, Fox Business and Fox News, among other news outlets.
Chad Moutray

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