Texas Manufacturing Activity Is No Longer in Free Fall

The Federal Reserve Bank of Dallas has released its monthly Texas Manufacturing outlook covering May 2020. The numbers look atrocious, as the economy and oil had been in dire straits, but the Dallas Fed’s stance is that the severity of the drop has eased.

Texas factory activity was lower in May, but the production indexes decline improved to −28.0 from April’s −55.6 reading. This slower pace of decline suggests that the contraction in output already has eased somewhat since April. Data was collected between May 12 and May 20, and the report is based on survey responses from 115 Texas manufacturers.

Other aspects of the report also pointed to May showing a less severe decline than what was seen during this recession in April’s data. The new orders index improved by 38 points to -30.6 in May, and that was represented as the highest reading in three months. More than 20% of manufacturers also reported an increase in orders.

The growth rate of orders saw its index rise over 30 points to −30.8 in May. The capacity utilization and shipments indexes also remained negative (−26.0 and −25.7, respectively), but both readings were up from levels reported in March and April.

Perceptions of overall business conditions were still negative in May, but they were somewhat less pessimistic than in the prior report. May’s general business activity index moved up from −74.0 to −49.2. The company outlook index moved up nearly 30 points to −34.6, but only 12% of manufacturers noted improved outlooks.

The index measuring uncertainty in the outlooks fell to 28.3, but the Fed’s notes indicated that the positive reading still indicates increased uncertainty.

Labor market weakness persisted in May, showing further declines in total employment and shorter workweeks. The employment index remained negative, but the index rose to −11.5 from −22.0 a month earlier. Only 8% of the manufacturing firms surveyed noted net hiring, while 19% reported net layoffs. The hours worked index rose by 18 points to −22.8 in May, but the negative reading still signals a reduction in hours worked per week.

Prices and wages showed mixed movements, and the expectations regarding future business conditions also were mixed in May. The Dallas Fed showed the raw materials prices index returned to positive territory after two negative readings, coming in at 2.5, while the price index for finished goods remained negative but moved up from −25.0 to 19.4.

The wages and benefits index came in at zero, which the Dallas Fed sees as no change in compensation costs after having dipped into negative territory in April for the first time since the Great Recession.

There was a sharp decline in the negativity around the future as well. The Dallas Fed’s index of future general business activity rose 24 points in May but remained a cautious −19.0 reading. The Dallas Fed further noted that most indexes for future manufacturing activity returned to positive territory from contraction in April.

Manufacturing in Texas is not centered entirely around oil and gas, but that was the Fed’s focus on special questions regarding the low oil prices and weak climate that had been seen in April.

Numbers like this are very hard to celebrate. That said, the opinions a month earlier might have projected that May would be even worse rather than better.