Plunging Oil Prices Already Biting Into Texas Manufacturing Growth, Creating More Uncertainty Ahead

Jon C. Ogg

The recent plunge in oil prices already appears to be taking a bite out of the Texas economic regional output. While the numbers are still indicative of growth, the Federal Reserve Bank of Dallas says that manufacturing activity in Texas is expanding at a slower pace as uncertainty increases.

The Federal Reserve Bank of Dallas Texas Manufacturing Outlook Survey shows that the production index fell by nine points to 8.4 in November. This is considered to be a key measure of state manufacturing conditions and shows that output growth has continued to slow as of November 2018.

Unfortunately, the demand indicators all declined in November. The new orders fell to 9.7 and the growth rate of new orders fell to 4.8. These figures represented their lowest readings in 20 months, according to the Dallas Fed’s report.

Another drop was seen in the capacity utilization index, falling six points to 9.4 in November. The shipments index fell by nine points to 7.7. The Dallas Fed pointed out that these were both at their lowest growth levels in at least 20 months.

All in all, Texas manufacturers were less optimistic than in October and their uncertainty increased. The November report said:

The general business activity and company outlook indexes posted double-digit declines, coming in at 17.6 and 13.7, respectively, but both are still well above long-term averages. The index measuring uncertainty regarding companies’ outlooks rose five points to 12.3, indicating uncertainty was more widespread this month… Labor market measures suggested slower employment growth. The employment index retreated eight points to 15.9. The hours worked index edged down to 4.9.

While lower prices might sound good for the economy as a whole, this may not be automatically assumed for Texas. The Dallas Fed’s report showed that price and wage increases eased in November from higher readings in October. The raw materials prices index fell by a sharp 21 points to 33.7 in November. Those materials prices had just reached a seven-year high in October. The finished goods prices index fell by 10 points to 7.5 in November.

Expectations regarding future business conditions remained positive in November. Still, they were less optimistic than in October. The Dallas Fed said:

The indexes of future general business activity and future company outlook remained well above average but fell to 25.7 and 31.4, respectively. Other indexes of future manufacturing activity showed mixed movements this month but remained solidly in positive territory.

Recall that positive readings in the survey indicate expansion of factory activity and readings below zero generally indicate contraction. Data were collected from November 12 through November 20, with 114 Texas manufacturers responding to the survey.

Emily Kerr, Dallas Fed senior business economist, said of November’s full report:

Growth in Texas manufacturing activity slowed further this month, continuing a trend that started in the third quarter. Price and wage growth also decelerated in November, particularly for input costs.

Two-thirds of firms report difficulty finding qualified workers when hiring, with the most acute difficulty noted for mid-skill positions. Two-thirds of firms also say they are raising wages and/or benefits to recruit and retain employees, a share that is up notably from about 50 percent a year ago.

If you want the source for the drop in manufacturing in the Texas region, you may need look no further than the price of oil. NYMEX crude was last seen trading at about $52.00 per barrel, after having challenged the $50 mark just last week. That is down from over $75 at the start of October, and crude oil had its largest losing streak since futures started being tracked back in the early 1980s.

While some of the report may be surprising, two prior reports had already indicated that growth in Texas was losing steam. Two reports ahead of Monday’s manufacturing report are cited below.

The Dallas Federal Reserve’s statement for October’s overall Texas economic indicators was released on November 19, 2018. That statement from the introduction said:

Texas economic growth remained healthy in October. The state added jobs at a strong pace, with the expansion widespread across metros and most industries. Unemployment set a record low in the state and ticked down in most of its major metros. The Texas Business Outlook Surveys indicated that manufacturing output and service sector activity continued to expand in October, though at a slower pace than in September. Potential headwinds to the state economy include a historically tight labor market and a recent decline in oil prices.

A separate report from November 14, 2018, was titled “Texas Economy Continues Expansion but Shows Signs of Cooling.” That statement from the introduction said:

Texas economic growth remains robust but is showing signs of moderating. While many major Texas metros saw employment gains in the third quarter, state job growth was slower compared with the first half of the year. On the whole, the Texas labor market continues to tighten. The unemployment rate hit a record low in September, and reports of wage pressures persist. Housing indicators suggest supply and demand constraints, with a drop in home sales and affordability coinciding with low inventories.