The Richmond Federal Reserve Bank observed contracting levels of manufacturing activity in July. This bucked the trend that we saw last week from the New York and Philadelphia Fed surveys, which both noted improvements this month. The composite index of general business assessment declined from 7 in June to -11 in July, its first decline since May and the fourth so far in 2013.
Reduced new orders, shipments, and capacity utilization weakened sentiment in the Richmond district, reversing the progress observed in June. For instance, the index of new orders dropped from 9 in June to -15, a surprisingly sharp decline in sales, particularly given some of the other national indicators which have shown the opposite. The average workweek grew at a slower pace (down from 11 to 2). Meanwhile, hiring in the region has stalled, with the index for employment unchanged at zero. The silver lining is that it is no longer falling, as it had been negative in both April and May.
Despite the current softness in the marketplace, the respondents in the Richmond Fed survey continued to be cautiously optimistic about the second half of 2013. In fact, the data indicate that manufacturers anticipate decent growth in both new orders (up from 21 to 24) and shipments (also up from 21 to 24) over the course of the next six months. At the same time, they expect to see modest gains in both employment (down from 9 to 5) and capital expenditures (up from 9 to 11), suggesting that business leaders plan to add workers and increase their investments on the basis of possibly higher prospects in the coming months. Still, it is notable that hiring remains more sluggish than other perceived improvements in activity moving forward, as evidenced by the easing in this month’s reading.
Pricing pressures, meanwhile, have picked up, but are still not at elevated levels. The prices paid for inputs increased 1.60 percent at the annual rate in July, up from 1.13 percent in June and 1.00 percent in May. Manufacturers anticipate some acceleration in raw material costs, but not much changed from what was seen last month. Input costs are anticipated to grow 2.06 percent on average six months from now, just marginally higher than the 2.01 percent predicted in the June survey. It will be interesting to see where that figure goes in the coming months, particularly given the recent run-up in energy costs.
Chad Moutray is the chief economist, National Association of Manufacturers.