Manufacturing activity in the Fifth District expanded strongly in August, with the Richmond Fed Manufacturing Index rising 4 points to 24. Exceeding the consensus forecast as well as the range of analysts' expectations, the strong August growth was broad-based, buoyed by increases in shipments, up 7 points to 23, new orders, which rose 3 points 25, and employment, where the number of employees was up 3 points to 22.
Other current conditions components showing large gains in strength and perhaps signs of overheating in August were backlog of orders, which rose 11 points to 15, capacity utilization, up 10 points to 18 and vendor lead times, which rose 18 points to 35.
Despite the overwhelming strength, a few components did register decreases from the levels seen in July. Local business conditions were down 5 points to 13, and capital expenditures were down 4 points to 21. Inventories also posted declines, both for finished goods, down 6 points to 4, and raw materials, down 5 points to 20.
And while employment and wages (up 3 points to 25) continued to rise, manufacturing firms continued to struggle in finding workers with the skills needed. Available skills fell further into deeply negative territory in August and were down 1 point to minus 17, the lowest reading for this employment sub-component on record.
On the inflation front, respondents from manufacturing firms reported slower growth in both prices paid and prices received in August, while input prices continue to outpace growth in prices received. However, manufacturers do expect this gap to narrow in the coming months, expecting slowing of growth in prices paid and further acceleration in prices received.
Contrasting with slowing reported by the Philadelphia Fed and Kansas City Fed and more aligned with the strength seen in the Dallas Fed manufacturing survey, the Fifth District's expansionary acceleration in August will probably bolster the case for more rather than less tightening by the Fed.