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Tuesday, November 24, 2015 2:05 PM

Richmond Fed Region Negative Again; Inventories Suggest Outright Disaster on Horizon

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Economists expected manufacturing activity in the Richmond Fed region would bounce into positive territory this month.

The Bloomberg Econoday Consensus Estimate was +1 in a range of 0-4, but the reading of -3 came in below any economist's estimate.

Early indications for the November factory sector are soft right now after Richmond Fed reports a much lower-than-expected minus 3 headline for its manufacturing index. Order data are very negative with new orders at minus 6, down from zero in October, and backlog orders at minus 16 for a 9-point deterioration. Shipments are also in contraction, at minus 2, with the workweek at minus 3. Employment, at zero, shows no monthly change but the declines for backlog orders and the workweek don't point to new demand for workers. Price data are subdued but do show some constructive upward pressure.

This report along with Empire State, as well as yesterday's manufacturing PMI, are pointing to a downbeat month for the factory sector which is being held down by weak foreign demand, as evidenced in the decline for goods exports in this morning's advance release of international trade data.
Ahead of the release, Bloomberg had this to say: "Regional Fed surveys have been showing improvement in November and the same is expected for the Richmond Fed's manufacturing index." 

"Details in this report, as in other manufacturing surveys, did show life in October but there were points of weakness including lack of growth for new orders and extended contraction for backlog orders."


The New York region came in at -10.74 below the lowest Econoday guess of -8.50. The prior (October) release was -11.36, but -10.74 is not an improvement, it's a decline at a lesser rate.

For more details please see Empire State Manufacturing Negative Fourth Month, Work Week Lowest Since Mid-2011.

There was an improvement in the Philly Fed region, to +1.9 (See Philly Fed Slightly Positive After Two Months of Contraction) but I labeled that "noise" given the new orders and shipment components were negative and the workweek collapsed to -16.2

No Signs of Life

Diving into the Richmond Fed Report, we see shipments, backlog of orders, and the average workweek all negative for the third month consecutive. New orders were down two of the last three months, and flat the third.

Check out those inventories!

Manufacturers are not only stockpiling raw materials, they have stockpiled finished goods with declining orders, hoping sales will pick up.

Outright Disaster on Horizon

Looking ahead, growth in inventories vs. declining shipments and new orders does not bode well for employment or the workweek. In fact, inventories suggest an outright disaster is on the horizon.

But hey, the six-month look ahead numbers look great.

Absurd Expectations

Unfortunately, history shows those expectations are ridiculous. I analyzed the New York region look-ahead expectations and in 167 months, nearly 14 years of data, there were only five months (just under 3% of the time) in which current conditions exceeded projections made six months previous!

For details, please see Tracking Manufacturing's Perpetual Overoptimism.

For a followup, also see Persistent Overoptimism Three Ways: Truckers, Fed Economists, Manufacturers.

Mike "Mish" Shedlock

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