Why Richmond’s manufacturing sector could not follow Chicago’s path

The economy and the fixed income markets: Must-know latest updates (Part 2 of 11)

(Continued from Part 1)

The Richmond Fed

Early indications on the manufacturing sector this month have been positive, but not from the Richmond Fed whose index remained negative at -7 compared to February’s -6.

The Richmond Manufacturing Index

The Federal Reserve Bank of Richmond Manufacturing Index is a composite index that represents a weighted average of the shipments (33%), new orders (40%), and employment (27%) indices. The data is released on the fourth Tuesday of each month.

What did latest reading indicate?

Weakness in the Richmond Manufacturing Index report for the month of March 2014, highlights unevenness in the manufacturing sector. New orders were unchanged at -9 for a second straight month with backlog orders at -13, down from -8 in February 2014. Shipments fell to -9 from -6 in the previous month. Capacity utilization slowed at -14 after -7 in the previous month. Employment at zero remained unchanged, while net inventory fell.

Market reactions

The Richmond Manufacturing Index is of particular importance because of the timing of its data release, which is close to month-end. It is normally followed by the influential Institute for Supply Management (or ISM) national manufacturing report, which is released at the beginning of the next month. Plus, investors assess the manufacturing data to understand the success of or weakness in the economy. The index is restricted to the region, and so, does not pose a greater threat to the overall economy when declining in the short run, but a consistent decline in the index will have negative connotations for the economy in long run. This, in turn, leads to volatility in the stock (SPY) and bond market (BND). The SPDR S&P 500 (SPY) with investments in 500 of the largest U.S. firms including names like Apple (AAPL), Exxon Mobil (XOM), and General Electric (GE) seeks the performance of the large capitalization sector of the U.S. equity market and is considered one of the best representatives of the U.S. economy.

Read on to know what Purchasing Managers’ Manufacturing and Service Index released this week indicated about the economy.

Continue to Part 3

Browse this series on Market Realist:

• Part 1 - Why Chicago’s manufacturing sector is no more a market concern

• Part 3 - Why new orders and business activity increased on national levels

• Part 4 - Wal-Mart and Target: Why this year’s late Easter impacted sales