Why profitability impacts manufacturers—Richmond Fed’s survey

Phalguni Soni
June 26, 2014

Overview: This week's economic releases—relook at the consumer (Part 10 of 11)

(Continued from Part 9)

Richmond Fed’s Survey of Fifth District Manufacturing Activity for June

The Richmond Fed will release the Survey of Fifth District Manufacturing Activity for June on Tuesday, June 24. The survey is a measure of manufacturing activity in the Fifth District. The Fifth District includes businesses in Washington D.C., Maryland, North Carolina, South Carolina, Virginia, and most of West Virginia. There are about 100 respondents for each survey, whose firm type, firm size, and location collectively match the profile of overall manufacturing in the Fifth District.

Highlights of the May survey

The headline index reading was reported at seven—the same as April’s reading. A reading above zero implies expansion and an increase in activity, while a reading below zero implies the opposite. Although the reading implied manufacturing was in a healthy growth zone, markets had expected the reading to come in at nine.

Besides implying manufacturing growth, the report had several other positives, which included the employment indicators and shipments. More importantly, firms reported wage gains, which has been a missing link of the labor market recovery so far. In negatives, new order volumes and capacity utilization was down in May.

Firms also reported inflationary trends for both prices received for finished goods as well as prices paid for raw materials. Prices paid increased at a faster rate than prices received in May. The demand environment is still uncertain and far from upbeat.

Outlook

The decline in new order volumes in May, might impact production levels this month. That said, the declines may be temporary as firms also reported gains in the average work week and wages. Employers tend to hire only when they are confident about their business’s economic prospects. Based on these factors, the index will probably continue to show manufacturing sector growth in the Fifth District this month.

In general, increases in manufacturing activity are beneficial to industrial stocks like those included in the Vanguard Industrials ETF (VIS) and the Industrial Select Sector SPDR ETF (XLI). Top ten holdings in both ETFs include companies like Caterpillar (CAT) and Boeing (BA). Both stocks are also part of the S&P 100 Index (OEF).

About the Richmond Fed’s Survey of Fifth District Manufacturing Activity

The Fifth District Manufacturing Activity Survey is a monthly survey conducted by the Federal Reserve Bank of Richmond. Respondents provide information on current activity including shipments, new orders, order backlogs, and inventories. They also provide feedback with respect to business expectations over the next six months. The headline number is the composite index for the current month’s activity. It’s a weighted average of the shipments (33%), new orders (40%) and employment (27%) indexes.

In the next section, we’ll preview the manufacturing survey conducted by the Kansas City Fed in the Tenth District. Please continue reading the next section in this series.

 

 

Continue to Part 11

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