Richmond Manufacturing Index

What Is the Richmond Manufacturing Index?

The Richmond Manufacturing Index is a gauge of manufacturing activity in the Fifth Federal Reserve District published by the Federal Reserve Bank of Richmond.

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 focuses shipments, new orders, order backlogs, capacity utilization, supplier lead times, number of employees, average work weak, wages, inventories, and capital expenditures. A rise in the index signifies improvement and growth, while a decrease in the index signifies a contraction.

The index is a diffusion index, i.e., it is equal to the percentage of responding firms reporting increases minus the percentage of firms reporting decreases in key business areas, with results based on the number of respondents.

The report is of importance to traders, economists, investors, and businesses alike as it provides an indication of the financial health of the manufacturing sector of the region. Tracking this economic data provides stakeholders with expectations for future performance, and this information affects the stock markets and the bond markets. The price trends data in the index is also watched to get an early read on 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 firms that are selected for participation according to their type of business, location, and firm size.

Respondents are asked to report on their business, including shipments, new orders, backlogs, inventories, wages, and capital expenditures, from the previous month. Respondents are also to provide their business expectations for the following six months.

A separate survey for service sector firms asks questions about revenues, demand, number of employees, average work week, wages, and capital expenditures. For retailers, the survey includes questions on current inventory activity, big-ticket sales, and shopper traffic.

The respondents are meant to notify how business activity transpired for the given period. If activity increased, decreased, or remained unchanged. These responses are then converted into diffusion indexes, noting the percentage decreases and the 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 released on the fourth Tuesday of every month. 

Example of the Richmond Manufacturing Index

For simplicity, the example will look at just the employment metric of the survey. The survey methodology works like this:

Say in April, 120 contacts responded to the survey question about employment and 78 (65%) indicated that employment increased, 24 (20%) reported that employment decreased, and 18 indicated (15%) no change in employment. In this case, the diffusion index for this question would be 65 minus 20, or an index reading of +45.

If the index reading in March, the month prior, was +30, then there has been an improvement in the manufacturing sector of the region from month to month. As the actual survey includes three main metrics, this would indicate that either employment, new business orders, or shipments have increased, or all three, or a combination of the three. Either way, the increase would signify growth and a bullish outlook.