Richmond Fed Survey - More Evidence Of Weakness
Last week we discussed the release of the Philadelphia Fed Survey which showed a slight uptick in the headline number. The problem, however, was that EVERY single gauge of future activity was negative. The recent release of the Richmond Manufacturing Survey provides further confirmation to the ongoing saga of "As The Economy Churns" showing a fall in the composite index to -7 in October from +4 in September.
What is even more concerning is the deterioration in virtually every subcomponent of the overall composite index from New Orders to Shipments, Capacity Utilization, and Employment. The chart below shows the changes in the the most recent report as compared to January of this year.
The buildup in inventories is likely unwanted as new orders have deteriorated and backorders have been worked down. This is why employment has deteriorated as demand is simply not strong enough to warrant hiring additional labor force. The plunge in Shipments since January, along with Capacity Utilization, is also why employment is continuing to deteriorate.
Also, as we saw with the Philadelphia Fed report, the Richmond District future expectations components have also moved in the wrong direction. The fall to ZERO in Cap Ex is a potential drag on GDP as business investment has been one of the key supports of GDP growth in quarters past. While wages and employment show expectations of improvement - the reality has been just the opposite. It is likely that these expectations will deteriorate further in future reports if new orders, shipments and backlogs continue to move in the wrong direction.
As we stated in the previous report "The declines in the future expectations components don't provide much hope for a sustainable upturn in index in the months ahead. The pickup in inventories, in both the current index and future expectations, are unwanted as declines in new orders are leading to a drop in the need for more employment.
The current Presidential candidates should be paying close heed to what this report is saying. Both candidates want to create jobs but the discussions about taxes and regulations, while important for long term economic growth, does not solve the immediate problem of end demand. The drops in new orders, rises in inventories, slowdowns in delivery times and negative levels of unfilled orders is putting businesses on the defensive. This translates into, as shown, less employment and more focus on cost cutting to protect profit margins."
That message is once again being conveyed by the Richmond Fed Survey. The aggregate end demand needed to push businesses and manufacturers into increasing employment is waning. The ongoing recession in Europe, and slow down in China, is impacting domestic activity. The continued slate of misses by U.S. corporations in the 3rd quarter have been heavily focused in declines in topline sales with guidance pointed towards additional future weakness as the Eurozone recession continues.
The problem that Bernanke has run into with the latest round of bond buying is that the economic fundamentals are running in reverse from when the previous programs were launched. As we have stated in the past "The ongoing problem remains 'poor sales' which is the driver for all other business actions from increased capital expenditures to future employment."
No matter how you look at the data there is a clear disconnect between the Washington and Main Street. It is "economic uncertainty" that weighs on business owners and keeps them on the defensive and actions by the Federal Reserve to buy bonds, and inject liquidity into the financial system, does not solve the problems of "poor sales", excess regulations that strangle growth or solve the "fiscal cliff" issues that threaten business profitability by the end of the year.
While the economy is not "technically" in a recession at the current time - more and more indicators are sending up the warning flag. From last week's Philadelphia Fed Report and the LEI Coincident-to-Lagging Ratio to the most recent Richmond Manufacturing survey - the trends of the data are clearly weakening.