Another one bites the dust.

The Federal Reserve Bank of Richmond said Tuesday that the Fifth District Survey of Manufacturing Activity’s index dropped deep into negative territory, falling to the lowest level since May of 2020.

The composite index fell to minus 11 in January, significantly worse than the minus 3 consensus forecast of analysts surveyed by Econoday.  All three components of the headline index—shipments, new orders, and employment—declined.

The new orders index, a key measure of demand for factory goods and a leading indicator of future activity, plunged from minus four to minus 24, echoing the drop in new orders from 3.6 to minus 31.1 in the New York Fed’s Empire State survey.

The shipments index also fell into negative territory, dropping from a positive three to minus three.

Expectations for shipments and orders six months from now remain negative but less so than in the December survey.

Wages Still Sizzlingly Hot

The employment index dropped to minus three from positive three. This, however, was not accompanied by an easing in wage pressure. The index of wages jumped from 37 to 41. As recently as November, this was down at 25. This is the highest level for the wages metric since September of 2021. Expectations for payrolls and wages six months ahead rose.

The local business conditions index fell slightly, moving further into negative territory with a reading of minus 13 in January. Although the local business conditions expectations improved slightly from December, firms generally reported pessimism about conditions over the next six months.

The data comes from a monthly survey of manufacturing in the Fifth Federal Reserve District, which includes the District of Columbia, Maryland, North Carolina, South Carolina, Virginia, and most of West Virginia.

There was some good news on inflation and supply chains. The average growth rate of prices paid and prices received fell in January, and expectations for price inflation over the next 12 months fell to a level much lower than last year’s. Even with the declines, however, inflation remains—and is expected to remain—well above the Fed’s target. On average, manufacturers report paying 7.91 percent more for materials and components and charging 6.52 percent more for their products than a year ago. They expect prices they pay to rise 3.96 percent over the coming year and to raise their own prices by 3.72 percent.

Supply chain constraints appear to have eased, as the order backlog index declined deeper into negative territory and the index for vendor lead time remained below zero, indicating fewer delays.

A truck drives past ships docked at the Port of Los Angeles with cargo waiting to be unloaded in Los Angeles, California, October 14, 2021. (ROBYN BECK/AFP via Getty Images)

The Economy Is Rolling Over Everywhere

This Richmond Fed report appears to confirm the manufacturing recession suggested by last week’s reports from the New York Fed and the Philadelphia Fed. Manufacturing activity in New York state unexpectedly collapsed, the New York Fed survey showed. The Philadelphia Fed’s survey remained in contraction territory for the fifth straight month—and the new orders were in contraction for the eighth straight month.

If that were not worrisome enough, S&P Global’s Purchasing Managers’ Index (PMI) for both manufacturing and services indicated contraction as well. The manufacturing barometer edged up to 46.8 from 46.2, and Services PMI inched up to 46.6 from 44.7. The Composite PMI came in at 46.6, up a bit from 45 in December. While these came in slightly better than expectations, all three were below the 50 threshold separating growth from contraction.

“Although moderating compared to December, the rate of decline is among the steepest seen since the global financial crisis, reflecting falling activity across both manufacturing and services,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.

It’s likely these figures will result in more calls for the Fed to step back from tightening and will fuel hopes that the Fed will pause earlier this year, perhaps before its target exceeds five percent. The confounding factor, however, is the strong labor market. Unless Fed Chair Jerome Powell is willing to abandon his thesis that the labor market must soften to achieve lasting progress on inflation, slumping output numbers will not mean an earlier pause or rate cut.