First New York, Then Philly, Now Richmond: U.S. Manufacturing Hits the Skids in May

WASHINGTON, DC - MAY 9: U.S. President Joe Biden listens to speakers during an event on hi
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The slowdown in manufacturing activity on display in reports from the Federal Reserve banks of New York and Philadelphia was confirmed by a survey from the Richmond Fed indicating that factory activity contracted in the mid-Atlantic region in May.

The Fifth District Survey of Manufacturing Activity index dropped 23 points from a positive reading of 14 in April to a minus nine, the lowest reading since May 2020, when much of the economy was still reeling from the onset of the pandemic and lockdowns.

The collapse into negative territory was unexpected. Analysts polled by Econoday estimated the index would hold steady at 14. Negative readings on the index indicate that activity declined for the month.

The Fifth District covers the District of Columbia, Maryland, North Caroline, South Caroline, Virginia, and most of West Virginia.

Both the new orders and shipments components of the index fell into negative territory for the month, indicating a plunge in demand.  New orders fell to minus 16 from six in April. Shipments dropped to negative 14 from positive 17.

The employment index, the third component of the composite index, fell to eight from 22 in April. It remains in positive territory, indicating that payrolls continue to grow, albeit at a slower pace than earlier in the year.

The measure of business conditions feel deeper into negative territory. The measure of optimism about conditions in the next six months also fell further into negative territory.

The measures of inflation showed a big increase in price levels, including an acceleration of prices charged by manufacturers. The prices paid index indicated that prices were up 15.13 percent from a year ago, up from the 11.83 percent gain in April and 11.05 percent in March. The prices received gauge showed prices up 9.57 percent, above the 8.93 percent gain in April and 9.16 in March. These figures indicate that inflation may not have peaked in March.

The outlook for inflation also grew worse. Manufacturers now say they expect to pay 7.29 percent more for materials 12 months from now, up from 6.09 percent in April. The expectations for prices received ticked up to 5.30 from 5.29 percent a month ago.

The Richmond Fed report comes hot on the heels of reports from the New York Fed and the Philadelphia Fed that came in much worse than expected. New York Fed’s Empire State survey of manufacturing showed business activity plunged. The index of general business conditions fell 36.2 points to a negative reading of 11.6 in May. New orders declined and fell into negative territory. Shipments fell at the fastest pace since early in the pandemic and also turned negative. Both the prices paid and prices received indexes moved lower but were still elevated, indicating strong inflationary pressures remain despite the slowdown in orders.

Manufacturing in the Philadelphia area expanded only marginally in May, slowing to nearly stall speed with the weakest growth in two years, a survey from the Federal Reserve Bank of Philadelphia showed last Thursday. The index for current general activity o plunged to 2.6 in May from 17.6 in April, the lowest reading since May 2020. Economists polled by Econoday had forecast a reading of 16.1. Unlike New York and Richmond, however, the indicators of demand were positive. The new orders index climbed to 22.1 in May from 17.8. The shipments index rose to 35.3 from 19.1 in April.

Inflationary pressures remained extremely high in the Philly Fed report. The prices paid index moved down to 78.9 from 84.6. The prices received index fell to 51.7 from 55.0. A special question this month asked firms to estimate future price inflation. The estimate for prices a year from now moved up to 6.5 percent from 5.5 percent in the February survey, the last time this question was asked. The estimate for annual inflation over the next ten years moved up to 3.5 percent from three percent. These indicators show that inflation expectations have been shifted by the persistently high inflation this year.

A separate survey compiled by S&P Global showed a broad-based slowdown in economic growth in May but not an outright contraction. The S&P “flash” services index dropped to a three-month low of 53.5 in May from 55.6. The manufacturing index also fell to a three-month low of 57.5 from 59.2. Both were worse than expected. Any score over 50, however, indicates expansion. The composite index fell to 53.8, below even the low range of estimates.

The Richmond Fed report did have some positive news on supply chains. Vendor lead time and order backlogs decreased in May from the record highs earlier this year. In the Philly Fed survey, delivery times were close to unchanged and backlogs rose. The New York survey showed vendor lead times growing.

The Kansas City Fed is expected to report on manufacturing activity in its region in May.


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