The Dallas Fed released its Texas Manufacturing Outlook Survey, popularly known as the manufacturing index report, which provides the region’s most up-to-date insights on the sector.
Texas’s industry is an important indicator of manufacturing health throughout the United States, as it is the second-largest state economy, and has the biggest contribution to national exports, especially among energy products.
Thus, state-level data from Texas usually provide a good indicator of broader trends throughout the United States.
In the publication, a positive number means that the majority of enterprises surveyed reported an improvement in the business environment, while a negative reading shows that a majority of entities experienced a worsening of conditions.
Ahead of the FOMC meeting that commences tomorrow, the Dallas Fed report showed that General Business Activity came in at -8.4, a marked improvement over the previous month while registering its ninth consecutive negative reading.
The all-important production index was barely positive at 0.2, compared to 9.1 in December 2022.
Source: Dallas Fed
Capacity utilization also slowed to 6.0, compared to 7.9, whereas shipments were hit, falling to -6.3, versus 0.4 in the last report. This marks the third negative reading for shipments in the previous four months.
Future production was the bright spot, having shifted higher to 16.1, rising from 10.5, and marking the fourth consecutive month of increase.
Although reflecting positive expectations among industry participants, it should be noted that this is well off the series average of 37.7.
New Orders continued to contract, measured at -4.0 as against -11.0 in the previous month, keeping the business environment sluggish.
Overall, demand is anaemic, with sectors such as textiles, paper manufacturing, printing activities and metal manufacturing witnessing a marked slowdown in business enquiries.
Of note, unfilled orders changed dramatically, from -1.3 in December 2022, to -6.7 in January 2023, far above the series average of -1.5.
Source: Dallas Fed
Of particular interest in the run-up to the FOMC meeting, are the prices of raw materials and finished goods.
Both categories stayed positive, but moderated from the previous month, with the raw material price index falling from 21.9 to 20.5, and finished goods easing from 10.9 to 9.9.
Reports suggest that elevated costs are at least partly concentrated in the beverage and tobacco sector, resulting in higher mark-ups but falling unit sales.
Source: Dallas Fed
Employment in the sector ticked higher with January 2023 registering a reading of 17.6, the highest figure since July 2022.
At the same time, the wages and benefits index, although very much in positive territory eased from 34.2 in the previous month, to 30.5.
This was the lowest reading since March 2021, which was recorded at 27.8, suggesting potential weakness in portions of the state manufacturing sector.
Yet, only 2.9% of respondents reported a decrease in wages and benefits.
Source: Dallas Fed
Along with general business activity which continued to be negative, the expectations of manufacturing firms and executives were mixed.
The Future General Business Activity Index stayed negative at -9.1, marginally improving from December’s -9.6, but marking the 9th consecutive negative reading.
The Company outlook index improved to -2.5, negative for the 11th consecutive month, whereas uncertainty in the outlook ticked higher to 16.8, from 15.6.
Regional manufacturing
Source: Dallas Fed; Federal Reserve System; Investing.com
The manufacturing sector has been trending largely downwards over the past year and is firmly placed in negative territory across various surveys.
Although Dallas, Philadelphia and Kansas City have been able to show some improvement in recent months, New York and Richmond continue to deteriorate sharply, shifting from -11.2 to -32.9, and from +1.0 to -11.0, respectively.
Outlook
Although the Dallas manufacturing production index marked the 32nd consecutive month of expansion, it was virtually flat and may enter negative territory, once rates are lifted amid recessionary fears.
Although pessimistic sentiments eased, key indicators such as demand, production and shipments contracted, suggesting that the manufacturing base will continue its lacklustre performance in Q1.
Multiple surveys from various Federal Reserve offices suggest the decline in manufacturing could be widespread.
Having said that, the Dallas Fed survey expectations appear somewhat contradictory, with the future business activity index deteriorating, but production is forecast to rise. These indicators will likely worsen during the next report if the Fed tightens this week.
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