DEFINITION of 'Richmond Manufacturing Index'

Richmond Manufacturing Index is a gauge of broad activity in the manufacturing sector located in the Fifth Federal Reserve District, published by the Federal Reserve Bank of Richmond. This composite index represents a weighted average of the shipments, new orders and employment indexes. Each index is a diffusion index, i.e. it is equal to the percentage of responding firms reporting increases minus the percentage reporting decreases, with results based on responses from 80 out of 110 firms surveyed.

BREAKING DOWN 'Richmond Manufacturing Index'

Traders consider the Richmond Manufacturing Index of some importance because it is released close to month-end and may offer some clues on what the influential Institute for Supply Management (ISM) national manufacturing report - released at the beginning of the month - may hold. The price trends data in the index is also watched to get an early read on potential inflation.

How The Index Works

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, according to the Richmond Fed.

Some 200 entities receive questionnaires and the response rate is 90% to 95% in a typical month. Respondents are asked to report on their business, including shipments, new orders, order backlogs, inventories, and expectations for business activity during the next six months. A second survey for service sector firms asks questions about revenues, number of employees, average wages, and prices received. For retailers, the survey includes questions on current inventory activity, big ticket sales, and shopper traffic.

"Participants indicate whether measures of activity increased, were unchanged, or decreased since the previous survey. The responses are converted into diffusion indexes by subtracting the percent reporting a decrease from the percent reporting an increase. Seasonal adjustments are recalculated annually in July to better reflect current economic trends; however, we make no commitment in this regard," the Fed stated.

State-level information on business activity can be found in monthly reports for Maryland, North Carolina and South Carolina. The summary results of each survey are released to the public at 10:00 a.m. ET on the fourth Tuesday of the month. 

The survey methodology works like this: For example, say 120 contacts respond to the question about employment activity and 78 (65 percent) indicate that employment increased, 24 (20 percent) report that employment decreased, and 18 indicate no change in employment. In this case, the diffusion index for this question would be 65 minus 20, or an index reading of 45, according to the Fed.

RELATED TERMS
  1. Federal Reserve Bank Of Richmond

    The Federal Reserve bank of Richmond is responsible for the fifth ...
  2. ISM Manufacturing Index

    The ISM Manufacturing Index is based on Institute for Supply ...
  3. National Association Of Purchasing ...

    The National Association of Purchasing Managers Index is a monthly ...
  4. NY Empire State Index

    The NY Empire State Index is a seasonally adjusted index that ...
  5. Quarterly Services Survey

    The Quarterly Services Survey is produced by the Census Bureau ...
  6. CEO Confidence Survey

    The CEO Confidence Survey is a monthly survey of 100 CEOs from ...
Related Articles
  1. Insights

    Tankan Survey Provides Clues To Japanese Economy

    This quarterly survey is crucial for assessing Japan's economic health.
  2. Insights

    Why the Purchasing Managers' Index Matters

    The Purchasing Managers' Index is a telling sign of the U.S. economy. But what is it?
  3. Insights

    What You Need To Know About The Employment Report

    This widely watched indicator of economic well-being directly influences the market.
  4. Insights

    Empire State Manufacturing Survey: Upside Surprise

    The New York Federal Reserve's Empire State Manufacturing Survey came in at a seasonally adjusted 0.62 for March on Tuesday, much higher than Bloomberg's consensus estimate of -11.25 and well ...
  5. Trading

    Using The ISM Manufacturing Index To Find Forex Trends

    Learn the details behind the ISM Manufacturing Index and how you can use this data to find trends in the foreign exchange market.
  6. Insights

    2017 is the Year of Volatility: Natixis Institutional Investor Survey

    The survey of roughly 500 institutional investors indicates an interest in active management as market volatitlity continues to rise.
  7. Investing

    The Hidden Flaws of Index Investing

    Index investing isn't always better than active investing. Here's why.
  8. Investing

    Global Manufacturing: Exploring Revenue Trends and Fundamentals

    Learn about the significant global trends influencing the manufacturing sector, and the effect these trends are having on both emerging and developed countries.
RELATED FAQS
  1. Consumer Confidence Vs. Consumer Sentiment

    Is there any real difference between consumer confidence and consumer sentiment? Read Answer >>
  2. Is it Possible to Invest in an Index?

    While you cannot buy indexes, which are just benchmarks, we'll show you three ways for you to mirror their performance. Read Answer >>
  3. Which benchmarks / indexes track the automotive sector?

    Explore some of the major benchmark equity indexes worldwide that analysts and investors use to track the performance of ... Read Answer >>
Trading Center