Key Takeaways:
Manufacturing activity in the Richmond Fed's district expanded at the fastest pace in months, with the composite index surging to 13 — more than three times the 4 expected by economists.
Manufacturing activity in the Richmond Fed's district jumped to 13 in May from 3 in April, more than tripling the 4 consensus estimate as shipments, new orders and employment all rose.
"All three component indexes — shipments, new orders and employment — rose this month, with the future expectations index for employment climbing to 23 from 7," the Richmond Fed said in its monthly survey of Fifth District manufacturers.
The average growth rates of prices paid and prices received decreased in May, the survey showed. Firms expect price growth to moderate further over the next 12 months. The future indexes for shipments and new orders moved deeper into positive territory, suggesting manufacturers anticipate continued expansion through the middle of the year.
The stronger-than-expected reading reduces the likelihood of near-term rate cuts, with markets pricing a 58% probability of a Fed rate hike later this year, according to fed funds futures data. The moderation in price growth, however, provides some relief for policymakers weighing the trajectory of inflation ahead of the Federal Open Market Committee's next decision.
The survey covers companies within the Fifth Federal Reserve District, which includes the District of Columbia, Maryland, North Carolina, South Carolina, Virginia and most of West Virginia. The composite index's jump from 3 to 13 represents the largest month-over-month increase since early 2024, based on Richmond Fed historical data, and follows a period of subdued factory activity that had raised concerns about the sector's health.
The employment expectations index rose to 23 from 7, indicating that firms in the region expect to add workers in the coming months. This aligns with broader labor market resilience, though the Conference Board's Consumer Confidence Index eased to 93.1 in May, highlighting concerns over rising living costs and weaker household spending. The divergence between manufacturing optimism and consumer caution underscores the uneven nature of the economic recovery.
Price Pressures Ease as Cost Growth Moderates
The average growth rate of prices paid by manufacturers decreased in May, while prices received grew at a slower pace. Firms surveyed expect both input and output price growth to moderate over the next 12 months, a trend that could support the case for the Fed to hold rates steady at its next meeting rather than resume tightening.
The Richmond Fed data follows a mixed picture for the U.S. economy. While manufacturing appears to be gaining momentum, the services sector has shown signs of cooling. The divergence complicates the Fed's policy calculus as it balances inflation risks against growth concerns, particularly with the personal consumption expenditures price index — the Fed's preferred inflation gauge — still running above the central bank's 2% target.
U.S. stock index futures climbed Wednesday on AI optimism and hopes for a US-Iran peace deal, with the S&P 500 and Nasdaq called higher. The yield on the 10-year Treasury narrowed to 4.47% from 4.51%, reflecting cautious positioning ahead of the ADP employment report also due Wednesday. Brent crude oil fell to $97.19 a barrel as geopolitical tensions showed signs of easing.
The last time the Richmond Fed composite index posted a comparable surge was in early 2024, when it jumped from 2 to 12 over a two-month period. That expansion was followed by a sustained period of above-trend factory output across the Southeast and Mid-Atlantic regions, according to Federal Reserve industrial production data.
The Richmond Fed survey is one of several regional Fed manufacturing gauges that feed into the national ISM manufacturing index. The May reading suggests the national factory gauge, due next week, could show expansion after contracting in April. Economists surveyed by The Wall Street Journal expect the ISM manufacturing index to rise to 49.5 from 49.2, still below the 50 threshold that separates growth from contraction.
This article is for informational purposes only and does not constitute investment advice.
