Macro Monday 35~Richmond Fed Manufacturing and Services IndexMacro Monday 35
Richmond Fed Manufacturing and Services Index
(Released Tuesday 27th Feb 2024 @ 15:00 GMT or 9:00 CT)
The Richmond Manufacturing and Services Indexes measures the conditions of each respective industry for the 5th Federal Reserve District which covers the District of Columbia (Washington DC), Maryland, North Carolina, South Carolina, Virginia, and most of West Virginia. Both the indexes are derived from surveys conducted each month of relevant businesses in each respective industry.
▫️ The Richmond Manufacturing Index survey focuses on questions related to production, new orders, employment, prices, capacity utilization, and future expectations within the manufacturing sector.
▫️ The Richmond Services Index survey, on the other hand, asks questions about business activity, new business, employment, prices, inventory, capital expenditures, and future expectations within the service sector.
While the specific questions and data points might differ between the surveys, the basic structure and methodology for calculating the diffusion indices remain consistent;
The Chart
You can see that the green zone is expansionary and the red zone is contractionary.
At present Manufacturing (blue line) is in fairly deep contraction at -15 and whilst Services (red line) has recovered from -22 (Apr 2023) to +4 (Jan 2024).
Reading the Chart:
🟢Above 0 is expansionary (green zone)
🔴Below 0 is contractionary (red zone)
Historic Recession Patterns
I have highlighted some patterns on the chart (orange) which demonstrate that historically when Services and Manufacturing declined for a period of between 27 and 45 months a recession can follow such declines. Importantly there was a period of decline in from Apr 2010 – Dec 2013(45 months) which did not result in a recession. During this period Services remained elevated and only fell marginally into contractionary territory for brief spells (which could be a tell of some buoyancy in the market during this period). At present we are 32 months into a general decline in both manufacturing and services. Services have been on the incline since Apr 2023 and recently moved into expansionary territory at +4 in Jan 2024 which is promising and may indicate the beginning of a trend change, however until manufacturing follows this trajectory I believe we are still at risk of repeating history. Manufacturing is down at -15 at present and needs to start as sustainable recovery into expansionary territory. It has remained more a less in contractionary territory since Apr 2022.
Why even consider the Richmond Fed index?
I think the best way to outline the utility of the Richmond Fed is to compare it to the Dallas Fed Index which will be released later today (Monday). I have covered the Dallas Fed on a previous Macro Monday (link will be in the comments) and I will update you on this index when it is released later today also.
Both the Richmond Manufacturing Index and the Dallas Fed Manufacturing Index are valuable indicators of regional manufacturing activity, each offering unique insights.
Dallas Fed Index focuses on a major economic manufacturing hub – Texas
(An estimated 14.4 million people are employed in the state of Texas)
The Dallas Fed Manufacturing Index covers manufacturing activity mainly in the state of Texas. The state of Texas ranks 2nd only to California in factory production & comes in at 1st as an exporter of manufactured goods, thus Texas is an important state for gauging manufacturing & production in the U.S. economy (not services is not included here). Texas also contributes an incredible c.10% towards the U.S. Manufacturing gross domestic product making the index an important metric to consider towards potential GDP trends in the U.S. So, the Dallas Fed is very good at gauging manufacturing in the U.S. simply because of the volume of manufactured goods from the region. Whilst the Dallas Fed Index focuses on a high volume of manufacturing activity and production within the state of Texas, it also specifically focuses on durable goods industries like aerospace, energy, and technology whilst the Richmond Index below is much more diversified in terms of its manufacturing industries, its services sector and regionally diverse.
Richmond Index focuses on more economically diverse regions (inclusive of a large services sector)
(An estimated 23 - 25 million people are employed in the fifth federal reserve district)
This Richmond Index covers the Fifth Federal Reserve District, encompassing an incredibly diverse range of industries across six states. Its difficult to portray the expansive array of various manufacturing and services within these regions but I will try. This index goes far beyond the specific performance of durable goods in an isolated state like Texas and reflects manufacturing and services health across various sectors and regions. It offers economists a broader picture of manufacturing health in the U.S. compared to indices focused on specific industries or regions.
To give you an idea of the diverse ranges here:
In Washington DC you have a major corporate & services hub; think Accenture, Deloitte, KPMG, Capital One) combined with tech and comms center with the likes of Amazon web services, Verizon Communications & General Dynamics. You obviously have a strong political and legal presence in this region also.
Maryland, Virginia and North Carolina appear to have a very strong healthcare dynamic with the likes of Bon Secours Mercy Health System, VCU Health System, Duke University Health System and Atrium Health. Baltimore in Maryland has the Johns Hopkins Hospital and Health System employing over 40,000 employees. All these states appear to have strong university presences also (offering education employment and services) which likely supply the necessary expertise for the medical manufacturing and services that are present across these states.
South Carolina is known for having one of the major three Boeing aircraft manufacturing facilities and is also known the manufacturing of Michelin tires.
Across all six states you have a rich and diverse farming and forestry industry, food production facilities and waste productions plants.
Walmart, Home Depot, Target and Amazon are also present across all these states.
You can clearly see why the Richmond Fed offers a more nuanced and complex picture of the U.S. manufacturing and services economy. This diversity in sectors, regions and employment demographic gives us a different insight against the more centralized manufacturing hub contained in Texas under Dallas Fed Index. Furthermore, in terms of employment the six states included in the Richmond Fed Index is approx. 24 million versus the approx. 14.4 million employed in the state of Texas (under the Dallas fed Index). Both indexes are very valuable and should both be equally considered in our assessments of the U.S. economy.
Thanks for coming along and learning about the chart history on the Richmond Fed Index, the historic trends and the combined utility of both the Dallas and Richmond Fed Index .
PUKA
