Texas Manufacturing Remains Negative in June

Manufacturing activity is Texas continues to see pressure as the summer gets off to a start. The Federal Reserve Bank of Dallas has signaled that June’s manufacturing weakness continues despite the recent recovery in oil prices. Its index of general business conditions was shown to be -18.3 in June. Perhaps the May reading of -20.8 makes this reading look better, but the reality is that -18.3 is a significant contraction. The production index was not as bad at -7.0. While still negative, that is versus -13.1 in May.

Oil and gas is driving this bus. Frankly, economic readings in the Texas region are likely to remain subdued in the months ahead if oil prices remain anywhere close to the levels that they are now. Many people cheered the return of $50.00 oil, but the harsh reality is that even $50.00 oil represents close to a net-net zombie mode for much of the oil and gas sector in America.

Market watchers will know that the Dallas Fed general activity has been weak of late. What may be less known is that it has been trending into the red since January of 2015. The oil prices started falling in 2014, but it was not until 2015 that the mudslide began – and that is when companies began cutting capital spending and sending workers home with pink slips.

Data collected for this regional report were taken from June 14 to June 22, and 114 manufacturers in the Texas area responded to the survey. Firms were asked whether output, employment, orders, prices and other indicators increased, decreased or remained unchanged over the previous month.

New orders were also in the red in June at -14.2, and the employment index was at a multi-year low of -11.5 in June. On employment, the Dallas Fed said:

The decline in the index was largely due to a falloff in the share of firms adding to headcounts. Only six percent of firms noted net hiring in June, down from 16 percent last month and well below the 18 percent noting net layoffs. The hours worked index edged down one point to -12.8, signaling continued contraction in workweek length.

The Dallas Fed showed that oil prices are currently near $50 per barrel, up from the $30 lows earlier in 2016. Still, this is lower than the $60 oil price a year ago and way down from when oil was over $100 in mid-2014. Additional index readings were shown as follows:

  • the growth rate of orders index fell four points to -18.6;
  • the capacity utilization and shipments indexes remained negative for a second month but edged up, coming in at -9.3 and -8.6, respectively;
  • the company outlook index posted a seventh consecutive negative reading but rose 5 points to -11.0;
  • input costs rose for a third month in a row, as the raw materials prices index held steady at 12.6. Selling prices continued to decline, with the finished goods prices index edging down to -5.2 in June;
  • the wages and benefits index stayed positive and relatively unchanged at 21.6, suggesting a continued rise in compensation.

The ‘special questions’ area of the report was focused on how lower energy prices are impacting business.  Those special questions were shown as follows:

  • What impact have lower energy prices had on your business over the past six months?
  • Overall, what has been the net impact of lower energy prices on your business over the past six months?
  • What are the top three concerns affecting your company’s outlook?