Richmond Fed manufacturing index analysis: Shipments decline to near 3-year lows

The Richmond Fed released its survey of manufacturing activity for February which reported a decline to -16 from -11 in January 2023.

The reading severely underperformed market expectations of -5, suggesting that a greater than anticipated percentage of respondent firms had seen a decline in operations.

In December 2022, the index was recorded at +1, highlighting the sharp deterioration.

The manufacturing index is made up of a combination of shipments, new orders and employment indexes which account for 33%, 40% and 27%, respectively.

The pessimism in business conditions was led by shipments which fell to -15 from -3 in the previous month, reflecting additional weakness in underlying sentiment.

In December, this was recorded as high as +5.

New orders continued to show weakness at an unchanged -24.

The employment index also declined to -7 from -3 in the previous month with a lower proportion of companies willing to hire.

Source: Federal Reserve Bank of Richmond

The manufacturing index, shipping, new orders and employment index slipped to their lowest since May 2020, June 2022, May 2022, and May 2022, respectively.

Raw materials and finished goods inventories were in positive territory at an unchanged +21 and down from +14 to +13, respectively.

Capital expenditures declined sharply since December 2022, contracting from +10 to -3 in the latest print, while labour market wages moderated from +41 to +31.

The contraction in capital expenditure is likely a response to uncertainties about consumer behaviour and the continued hawkishness of the Fed.

Interested readers can review developments on rising inflation and the Fed’s stance in this article.

The growth rate of prices paid was down marginally from 7.91 in January 2023 to 7.90 in February.

At the same time, the growth rate of prices received slowed from 6.52 to 5.54.

Manufacturing expectations

Six-month expectations for shipments were up at +8, improving from -7 in January.

Firms were optimistic of a recovery with six-month forward expectations of new orders shifting up from -6 in January 2023 to +14.    

Hiring trends are projected to be strong on the back of improving expectations for the sector, although future employment moderated from +16 to +14.

Over a 12-month period, growth in prices paid and received is expected to moderate to 4.52 and 2.85 from 3.96 and 3.72, respectively.

Six-month ahead capital expenditure expectations were unchanged at +4, a modest but crucial rise from the current condition of -3.

Services survey

Source: Federal Reserve Bank of Richmond

Services sector revenues stayed in negative territory for a fifth successive month but improved to -3 from -6, as against forecasts of -4.

Capital expenditure slipped sharply from +8 to -1, even though hiring remained largely positive, moderating from +9 to +5.

Local business conditions saw an uptick from -10 to -6 over the month, but pessimism prevailed among service providers.

Six-month ahead revenue growth expectations declined from +9 to +5, while business conditions continue to be negative, shifting from -12 to -10.

Surveyed firms are looking to continue strong hiring trends with 12-month expectations at +17.

However, expectations of six-month ahead wage growth increases slipped from +55 to +49.

Shortages of skilled labour remain a concern with the measure moderating to -4 in February 2023 as against -10 the previous month.


Both manufacturing and services surveys remained in negative territory in January 2023, although services showed an improvement while the downtrend in manufacturing accelerated.

Since manufacturing sometimes acts as a leading indicator of services, market watchers will be closely following next month’s data for early signs of a pull-back across services.

Capital expenditure may continue to suffer if the Fed stays the hawkish course in its March meeting.

The mismatch with skilled labour demand, particularly in services, is expected to be resolved in the coming six months.