The Richmond Federal Reserve Bank stated that the pace of manufacturing activity slowed somewhat in March. The composite index of general business conditions declined from 6 in February to 3 in March, indicating slight growth over the past two months. The new year began with a pretty steep contraction in January, with the index measuring -12, so the data for February and March suggest some degree of improvement, albeit with manufacturers in the region reporting slow growth.
One factor that could explain the deceleration in sentiment was the net decline in new orders in the Fed district. Sales growth continues to be very weak, with zero or positive measures in the new orders index just three times since May 2012. After sales declined sharply in January, they were unchanged in February, and the index stood at -4 in March. While the survey does not discuss it, it would be interesting to know how the across-the-board spending cuts (or “sequestration”) have impacted these results, especially with Virginia being one of the top states impacted.
With declining new orders, there were also falling measures for the backlog of orders and capacity utilization. Shipments data, though, continued to expand modestly, but at a somewhat slower pace. The index for shipments decreased from 10 to 8 for the month, and this was consistent with the modest growth in the average employee workweek. Moreover, unlike several other regional surveys, hiring appears to have picked up a little in the Richmond area, with the employment index up from 8 to 9. It had been negative in January.
Employment might be reacting to the cautious optimism for increased activity in the coming months. Measures of activity were higher across-the-board, with the index of new orders six months from now rising from 26 to 31. This indicates that manufacturers in the Richmond Fed region tend to expect higher levels of sales, shipments, capital spending, and employment moving forward. This finding tends to mirror what we see in other regions, as well.
In terms of pricing pressures, respondents noted a deceleration in inflation from last month. The prices paid for input increased 1.28 percent at the annual rate in March, down from 2.04 percent in February. Looking ahead six months, manufacturers in the Richmond Fed District expect for prices to rise 1.77 percent, down from 2.72 percent last
month.Chad Moutray is chief economist, National Association of Manufacturers.