Texas Manufacturing Sees Lower Production with Sharp Jump in Wages – Dallas Fed

The Dallas Fed manufacturing survey manufacturing index, a key measure of state manufacturing conditions, edged up to negative 17.2 in August from -20 in July, still deep in negative territory. The new orders index has now been in negative territory for over a year at -15.8 from -18.1. The production index, a key measure of state manufacturing conditions, fell six points to -11.2—its lowest level since May 2020. A telling comment from transportation equipment manufacturing, “Vendor price increases have slowed but have not been rolled back. Interest rates are killing our industry.”

Dallas Fed August 2023 manufacturing index

Highlights

  • The production index, fell six points to -11.2—its lowest level since May 2020.
  • The new orders index -15.8, up slightly from July.
  • The growth rate of orders index improved to -12.5 points to -20.6 which was just off the lowest value since mid-2020.
  • The capacity utilization index edged down to -3.7.
  • The shipments index dropped 14 points to -15.8.
  • The capital expenditures index dropped to -8.6, a three-year low.
  • The general business activity index stayed negative but ticked up to -17.2
  • The company outlook index largely unchanged at -18.4.
  • The outlook uncertainty index remaining positive, though it fell eight points in August to its lowest reading in more than two years.
  • The employment index decreased six points to 4.3, a reading below the series average of 7.8. Eighteen percent of firms noted net hiring, while 14 percent noted net layoffs.
  • The hours worked index slipped back into negative territory, coming in at -3.8.
  • The raw materials prices index rose seven points to 17.4, still well below its average reading of 27.6.
  • The finished goods prices index held steady at 1.8, a reading suggestive of little price growth this month.
  • The wages and benefits index shot up 16 points to 34.9, pushing past its average reading of 21.1.
  • The future production index remained positive but slipped to 6.3.
  • The future general business activity index returned to negative territory after pushing positive last month, coming in at -3.3.
  • Most other measures of future manufacturing activity retreated this month but remained in positive territory.

Data were collected Aug. 15–23, and 88 Texas manufacturers responded to the survey. The Dallas Fed conducts the Texas Manufacturing Outlook Survey monthly to obtain a timely assessment of the state’s factory activity. Firms are asked whether output, employment, orders, prices and other indicators increased, decreased or remained unchanged over the previous month.

Texas factory activity contracted again in August, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, fell six points to -11.2—its lowest level since May 2020.

Other measures of manufacturing activity also indicated contraction in August. The new orders index has been in negative territory for more than a year and posted a reading of -15.8, up slightly from July. The capacity utilization index edged down to -3.7, and the shipments index dropped 14 points to -15.8. The capital expenditures index dropped to -8.6, a three-year low.

Perceptions of broader business conditions continued to worsen in August.

The general business activity index stayed negative but ticked up to -17.2, while the company outlook index was largely unchanged at -18.4. Uncertainty regarding outlooks continued to rise, with the corresponding index remaining positive, though it fell eight points in August to its lowest reading in more than two years.

Labor market measures suggest slower growth in employment and shorter workweeks in August. The employment index decreased six points to 4.3, a reading below the series average of 7.8. Eighteen percent of firms noted net hiring, while 14 percent noted net layoffs. The hours worked index slipped back into negative territory, coming in at -3.8.

Price pressures remained rather subdued in August, while wage growth accelerated.

The raw materials prices index rose seven points to 17.4, still well below its average reading of 27.6. The finished goods prices index held steady at 1.8, a reading suggestive of little price growth this month. The wages and benefits index shot up 16 points to 34.9, pushing past its average reading of 21.1.

Expectations regarding future manufacturing activity were mixed in August.

he future production index remained positive but slipped to 6.3. The future general business activity index returned to negative territory after pushing positive last month, coming in at -3.3. Most other measures of future manufacturing activity retreated this month but remained in positive territory.

Comments from Survey Respondents

These comments are from respondents’ completed surveys and have been edited for publication.

Computer and electronic product manufacturing

  • High interest rates are affecting industrial production like never before. In addition to reshoring heavy activity, supply-chain issues, lack of qualified labor and interest rates have placed an inverted incentive to grow due to a major slowdown in capital equipment expenditures. This is the time to stop raising interest rates and give confidence to the industrial segments to plan growth. Rehiring after major layoffs in this industry is not like in the consumer industry. It is costly, laborious and a long-term expedition. And with the lack of reforms in immigration and education, we are encountering major difficulties in running industrial operations. Never mind the demographics issue the U.S. is about to encounter in the short run. I think it is time for the Federal Reserve to take a creative approach when it comes to interest rate management.
  • We have seen broader markets weaken with the exception of automotive. We have seen pull-ins from auto, likely due to preparation for the potential UAW [United Auto Workers union] strikes. Revenues in China are especially weak.
  • We are seeing increased issues with aluminum, especially casted products.
  • [Our business is] performing as planned.
  • For the first time in a long time, we are seeing customers reduce or cancel orders due to softening end-use demand. We expect this trend to continue over the next few months. We continue to make capital investments, focusing on buying high-quality used manufacturing equipment at a discount when other people are pulling back because of uncertainty.
  • Customer orders came to a sudden halt. The overall volume dropped 51 percent year over year.

Primary Metal Manufacturing

  • Our industry is in a technical recession. In addition to that, foreign imports are at a very high percentage if not the highest in our history. Mexico is a leading exporter to the U.S. now. They have a raw material advantage of not having Section 232 tariffs on their aluminum. Domestic companies in our industry are affected by the 10 percent duty, which Mexico is not, giving our competitors in Mexico a significant cost advantage.

Fabricated Metal Product Manufacturing

  • For a lot of businesses, production is sold out until February 2024.
  • Many RFQs [requests for quotation] are out with existing customers who have not been given the go ahead to start projects/improvements.
  • Supply constraints are improving, but there are still ongoing challenges with some suppliers.

Paper manufacturing

  • We have seen a very slight increase in orders for August and September.

Machinery manufacturing

  • Slow and steady is the current environment. Hopefully, this is not the new normal.
  • The phone is not ringing. Our sales team is working harder with less results. Projects are being postponed and, perhaps even more telling, payments are increasingly protracted.
  • Business is slowing down, but we are adding new products to produce. This should be positive for our business long term.

Chemical manufacturing

  • The chemical industry remains slow.

Transportation Equipment Manufacturing

  • Vendor price increases have slowed but have not been rolled back. Interest rates are killing our industry.

Food Manufacturing

  • It has been business as usual. We are working on new opportunities and satisfying existing customers. We are still in the “new normal” from a margins perspective.
  • We have seen a contraction in government contracts. Customer discretionary spending capability has decreased.

Printing and Related Product Manufacturing

  • We have been very fortunate to have a large job that has sustained us for most of the summer and will continue into September. Without this large job, we would have been stupid slow like a lot of our competitors are. There seems to be a softness in our industry right now, and because of that, we are worried about what six months from now looks like.

Textile product mills

  • [There were] no major changes this month in terms of pricing, staffing or outlook. Things have not deteriorated nor have they materially improved (still status quo, which is good and profitable). We are hoping to see an uptick in consumer spending and order volumes in the fourth quarter, similar to what we’ve seen in prior years.

Next release: Monday, September 25

Source: Dallas Fed Surveys Texas Manufacturing Outlook Survey