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.

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