Richmond Manufacturing Index Definition

What is the Richmond Manufacturing Index?

The Richmond Manufacturing Index is an indicator of manufacturing activity in the Fifth Federal Reserve District released by the Federal Reserve Bank of Richmond.

Key points to remember

  • The Richmond Manufacturing Index is an index of manufacturing activity in the Fifth Federal Reserve District, which covers Maryland, North Carolina, the District of Columbia, Virginia, most of West Virginia and South Carolina.
  • The Richmond Manufacturing Index focuses on new orders, employment and shipments, among others.
  • Information is received from hundreds of respondents from the manufacturing sector. It indicates the outlook for their business for the following month as well as for the next six months.

Understanding the Richmond Manufacturing Index

The Richmond Manufacturing Index is a monthly composite index that represents a weighted average of the business conditions of manufacturing companies in the designated region that concentrate shipments, new orders, order books, capacity utilization, supplier lead times, number of employees, low average labor, wages, inventory and expenses in capital. A rising index signifies improvement and growth, while a falling index signifies contraction.

The index is a diffusion indexthat is, it equals the percentage of responding companies reporting increases minus the percentage of companies reporting decreases in key business areas, with results based on the number of respondents.

The report is important for traders, economists, investors and businesses as it provides an indication of the financial health of the region’s manufacturing sector. Monitoring these economic data provides stakeholders with expectations of future performance, and this information affects stock markets and bond markets. Price trend data in the index is also monitored to get an early reading of potential inflation.

Richmond Manufacturing Index Survey

Since November 1993, the Federal Reserve Bank of Richmond has conducted the Monthly Survey of Manufacturing Activity, which is sent electronically to manufacturing companies selected to participate based on their type of business, location and size.

Respondents are asked to report on their activity, including shipments, new orders, backlogs, inventoriessalaries and capital expenditures, of the previous month. Respondents should also provide their business expectations for the next six months.

A separate survey for businesses in the service sector asks about revenue, demand, number of employees, average work week, wages and capital expenditure. For retailers, the survey includes questions about current inventory activity, significant sales and shopper traffic.

Respondents are expected to report how the business activity has been conducted during the given time period. Whether the activity has increased, decreased or remained unchanged. These responses are then converted into diffusion indices, noting percentage decreases and percentage increases.

The report includes business activity from Maryland, North Carolina, the District of Columbia, Virginia, most of West Virginia, and South Carolina. The results of each survey are published on the fourth Tuesday of each month.

Example of the Richmond Manufacturing Index

For the sake of simplicity, the example will focus only on the survey’s employment measure. The survey methodology works like this:

Let’s say that in April, 120 contacts answered the employment survey question and 78 (65%) indicated that employment had increased, 24 (20%) indicated that employment had decreased and 18 (15%) indicated no change in employment. In this case, the diffusion index for this question would be 65 minus 20, or an index of +45.

If the index reading in March, the previous month, was +30, then there has been an improvement in the region’s manufacturing sector month-over-month. As the actual survey includes three main metrics, this would indicate that employment, new orders or shipments increased, or all three, or a combination of the three. Either way, the increase would mean growth and a bullish prospects.

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