The Federal Reserve Bank of Dallas is out with its report on manufacturing activity for the month of April. We have seen continued regional weakness for reports covering March and April, and the report from Texas is not backing that trend at all. The Dallas Fed is showing a contraction in manufacturing activity. Today’s report is even named “Growth in Texas Manufacturing Activity Stalls,” and that does not exactly bring much confidence for a state that is supposed to be bolstered by the strong energy sector for oil and gas.
Business executives who responded to the Texas Manufacturing Outlook Survey showed that factory activity was flat in April. Our take is that describing this as flat is being too optimistic. Perceptions of broader business conditions worsened in April.
The general business activity index fell all the way to -15.6 from 7.4. This is the lowest reading since July 2012 and is far short of what was expected to be positive 5.0, according to Bloomberg, which even listed a range as being 3.0 to 8.0. The long and short of the matter is that this fell above and beyond every single expectation out there. The company outlook index turned negative by falling to -2.2 in April from 9.6 in March. Here is the summary that puts this all in perspective:
Expectations regarding future business conditions fell markedly in April. The index of future general business activity fell 22 points to -6.7, its first negative reading in five months.
The local production index fell from 9.9 to -0.5, and that is where the near-zero reading indicates “flat” output in the summary. Much of the report heads even further south from there. Capacity utilization in the Texas region fell to 2.7 in April from 5.5 in March. The shipments index fell to zero from 10.6 in March. New orders plummeted as the index fell almost 14 points to -4.9 and that was the first negative reading of 2013.
While the labor market indicators were said to have “remained mixed,” the readings might be better than expected under such a negative broad report. Employment growth in Texas is supposed to be one of the stronger spots helping out the local economy and offering an escape to employable workers in neighboring states looking for better opportunities. The employment index has been in positive territory so far in 2013, and the Dallas Fed said that this component rose to 6.3 in April, versus 2.6 in March and 2.0 in February. Some 26% of firms reported hiring new workers and 14% were reporting layoffs. One concern here is that the hours worked index continued to drop, falling to -6.5 in April from -2.4 in March. The wages and benefits index went lower to 17.7 in April, versus 18.5 in March, but the majority of manufacturers continued to note no change in compensation costs.
Pricing pressures abated in April, although the drop in energy prices already signaled that would be likely. Data were collected April 16 to 24 from 94 Texas manufacturers who responded to the survey. Today’s news from the Dallas Fed is not hurting the markets as the S&P 500 is still up more than nine points and the DJIA is up 68 points. Our take is that this is just one more negative regional reading that continues to show that growth is either slow or nonexistent.