The Richmond Federal Reserve Bank said that manufacturing activity, which had contracted sharply in January, improved in February. The composite index of general business conditions rose from -12 in January to 6 in February. Indeed, there were signals of progress – as well as some continued weaknesses – in many of the key indicators. For instance, the shipments index increased from -11 to 10, and capacity utilization jumped from -18 to 11.
At the same time, new orders were unchanged, with the index up from -17 to zero. The fact that they were not declining, though, should be taken as a good sign. On the employment front, hiring turned positive for the first time since July, but the average workweek has decreased for three straight months. This suggests that employers are starting to think about bringing on more workers, even as the workload continues to lag behind.
To the extent that hiring is taking place then, it must be based on improving expectations about the future, and the forward-looking measure for hiring rose from being unchanged last month to a decent increase this month. Other indicators also reflected cautious optimism over the next six months, including increased index values for new orders, shipments, capacity utilization, and wages. The anticipated pace of capital spending, however, eased somewhat in February, but was still positive with modest growth ahead.
In terms of pricing pressures, respondents noted a deceleration in inflation from last month, but they expect for raw material prices to pick up the pace in the months ahead. The prices paid for input increased 2.04 percent at the annual rate in February, down from 2.54 percent in January. Looking ahead six months, manufacturers in the Richmond Fed District expect for prices to rise 2.72 percent, up from 1.97 percent last month.
Overall, this study finds a more optimistic manufacturing community in the Richmond region. To be fair, though, it is important to note that these gains in February are from a sharp decline in January. It will be interesting to see how these opinions shift in the coming month, particularly if the across-the-board spending cuts go into effect on March 1 as planned. Virginia – and for that matter, the entire metropolitan DC area – will experience some of the greatest impacts, as noted in our study released last year.
Chad Moutray is the chief economist, National Association of Manufacturers.