Dallas Fed: Texas manufacturing activity expands, business conditions improve

Texas factory activity increased in October, according to business executives responding to the Texas Manufacturing Outlook Survey, released October 25 by the Federal Reserve Bank of Dallas. The production index, a key measure of state manufacturing conditions, was positive for the second consecutive month and slightly higher than its September reading.

Despite the rise in output, several other manufacturing activity indicators fell again. The new orders and shipments indexes were negative for the fifth consecutive month. The capacity utilization index dipped below zero, with more than one-quarter of respondents reporting a decrease.

Measures of general business conditions improved markedly in October, suggesting the broader economy strengthened. After four months in negative territory, the general business activity index rose sharply from minus-18 in September to 3 this month. The company outlook index also jumped up, rising from -4 to 13. The advance in the index was largely due to a sharp decline in the share of manufacturers reporting a worsened outlook, falling from 25 percent to 13 percent.

Labor market indicators worsened slightly in October. Hours worked fell for the fourth consecutive month, and the employment index dipped back into negative territory, with 15 percent of firms reporting layoffs compared to 11 percent reporting hiring. The wages and benefits index remained positive and edged up, although 80 percent of respondents noted no change in compensation costs.

Price pressures were mixed in October. Input costs continued to climb, with the raw materials price index rising from 24 to 30. Thirty-five percent of manufacturers saw an increase in prices paid for raw materials, compared with only five percent seeing a decrease. Finished goods prices fell as the index slipped into negative territory after a near-zero reading in September. Over the next six months, 43 percent of respondents anticipate further increases in raw materials prices, while one-quarter expect higher finished goods prices.

Manufacturers’ six-month outlook improved further in October. The future indexes for production and capacity utilization rose again, as did the future index for new orders, with more than half of firms expecting an increase in order volume six months from now. The future general business activity index advanced from 5 to 14, and the future company outlook index rose to 27, with more than 90 percent of firms anticipating flat or improved conditions six months from now.

The Dallas Fed conducts the Texas Manufacturing Outlook Survey monthly to obtain a timely assessment of the state’s factory activity. Data were collected October 12–20, and 104 Texas manufacturers responded to the survey. Firms are asked whether output, employment, orders, prices and other indicators increased, decreased or remained unchanged over the previous month.

Survey responses are used to calculate an index for each indicator. Each index is calculated by subtracting the percentage of respondents reporting a decrease from the percentage reporting an increase. When the share of firms reporting an increase exceeds the share of firms reporting a decrease, the index will be greater than zero, suggesting the indicator has increased over the prior month. If the share of firms reporting a decrease exceeds the share reporting an increase, the index will be below zero, suggesting the indicator has decreased over the prior month. An index will be zero when the number of firms reporting an increase is equal to the number of firms reporting a decrease.

Next release: November 29, 2010

Company Business Indicators Relating to Facilities and Products in Texas Current

Indicator Oct Index Sep Index Change Indicator Direction* Trend** (months) % Reporting Increase % Reporting No Change % Reporting Decrease Production 6.9 4.0 +2.9 Increasing 2 30.6 45.7 23.7 Capacity Utilization -2.3 3.9 -6.2 Decreasing 1 24.3 49.0 26.6 Volume of New Orders -4.3 -3.0 -1.3 Decreasing 5 24.6 46.4 28.9 Growth Rate of Orders -2.5 0.0 -2.5 Decreasing 1 22.2 53.1 24.7 Unfilled Orders -6.3 -14.0 +7.7 Decreasing 5 13.2 67.3 19.5 Volume of Shipments -2.3 -1.0 -1.3 Decreasing 5 25.4 47.0 27.7 Delivery Time -11.5 -9.0 -2.5 Decreasing 5 7.7 73.1 19.2 Materials Inventories -1.9 -3.0 +1.1 Decreasing 6 17.3 63.5 19.2 Finished Goods Inventories -12.5 1.0 -13.5 Decreasing 1 14.4 58.7 26.9 Prices Paid for Raw Materials 29.9 24.4 +5.5 Increasing 15 35.0 59.9 5.1 Prices Received for Finished Goods -3.5 0.5 -4.0 Decreasing 1 11.2 74.1 14.7 Wages and Benefits 10.6 7.2 +3.4 Increasing 11 15.4 79.8 4.8 Employment -4.1 1.8 -5.9 Decreasing 1 11.2 73.5 15.3 Average Employee Workweek (Hours Worked) -7.7 -1.0 -6.7 Decreasing 4 13.5 65.4 21.2 Capital Expenditures -1.9 -12.1 +10.2 Decreasing 2 11.8 74.5 13.7

General Business Conditions Current

Indicator Oct Index Sep Index Change Indicator Direction* Trend** (months) % Reporting Improved % Reporting No Change % Reporting Worsened Company Outlook 13.0 -4.3 +17.3 Improving 1 25.9 61.2 12.9 General Business Activity 2.6 -17.7 +20.3 Improving 1 23.3 56.0 20.7

Company Business Indicators Relating to Facilities and Products in Texas Six Months Ahead

Indicator Oct Index Sep Index Change Indicator Direction* Trend** (months) % Reporting Increase % Reporting No Change % Reporting Decrease Production 36.2 33.1 +3.1 Increasing 20 45.6 45.0 9.4 Capacity Utilization 36.0 25.3 +10.7 Increasing 20 43.8 48.4 7.8 Volume of New Orders 40.2 35.8 +4.4 Increasing 22 51.0 38.2 10.8 Growth Rate of Orders 35.4 22.5 +12.9 Increasing 20 43.4 48.6 8.0 Unfilled Orders 10.0 8.2 +1.8 Increasing 3 18.0 74.0 8.0 Volume of Shipments 34.9 30.8 +4.1 Increasing 20 43.5 48.0 8.6 Delivery Time -5.0 -5.1 +0.1 Decreasing 7 5.9 83.2 10.9 Materials Inventories 2.0 -4.1 +6.1 Increasing 1 19.0 64.0 17.0 Finished Goods Inventories -5.9 -10.3 +4.4 Decreasing 5 12.9 68.3 18.8 Prices Paid for Raw Materials 35.7 31.9 +3.8 Increasing 19 42.6 50.5 6.9 Prices Received for Finished Goods 11.0 19.8 -8.8 Increasing 3 25.0 61.0 14.0 Wages and Benefits 23.8 25.0 -1.2 Increasing 77 24.6 74.6 0.8 Employment 13.0 8.2 +4.8 Increasing 14 23.0 67.0 10.0 Average Employee Workweek (Hours Worked) 17.9 5.2 +12.7 Increasing 20 24.8 68.3 6.9 Capital Expenditures 10.1 6.2 +3.9 Increasing 11 18.2 73.7 8.1

General Business Conditions Six Months Ahead

Indicator Oct Index Sep Index Change Indicator Direction* Trend** (months) % Reporting Improved % Reporting No Change % Reporting Worsened Company Outlook 26.9 13.5 +13.4 Improving 17 36.5 53.9 9.6 General Business Activity 14.2 5.2 +9.0 Improving 2 27.3 59.6 13.1

*Indicator direction refers to this month's index. If index is positive (negative), indicator is increasing (decreasing) or improving (worsening). If zero, indicator is unchanged.

**Number of months moving in current direction.

Data have been seasonally adjusted as necessary. See information on seasonal adjustment.

Comments from Survey Respondents
These comments were selected from respondents' completed surveys and have been edited for publication.

Paper Manufacturing
"We've seen an uptick in orders, although they are still off from 2007 levels. We anticipate a normally slow November through January; then we expect things to pick up again."

Food Manufacturing
"We are still very adversely affected by high dairy prices and by record-high sugar prices."

Chemical Manufacturing
"September was a record month for us. We think some of what we have seen is that many of our customers depleted their inventory and needed to restock. This has now been accomplished, so orders will be flat. The rig count will determine how things move forward. If it holds steady, then business will be steady, but if the rig count drops off substantially, then business will drop as well."

Non-metallic Mineral Product Manufacturing
"Business conditions continue to stagnate. There is continuing pressure on operating margins from excess capacity in the marketplace."

"Current economic conditions remain lackluster at best. In light of the expected increase in foreclosures, we do not foresee any significant improvement in the home building industry until 2012."

Fabricated Metal Product Manufacturing
"Our incoming orders have been decreasing for several weeks, and September bookings were less than August. We believe this is because our customers have completed restocking their inventory levels after the drastic drawdown of 2009. Some of our markets are yet to wake up, but our most substantial market of oil and gas drilling is strong and continues to grow as measured by the Baker Hughes rig count, which is now only 15 percent below its 2008 high for the U.S. and Canada. We feel we will slow some over the next few months, but not drastically."

"We are experiencing a seasonal slowdown, but we also feel that normal activity is slowing."

"There seems to be a slowing in the fourth quarter due to uncertainty regarding the election outcome and the impact of tax and health care changes. We continue to see positive signs that a movement is growing recognizing the importance of made-in-America for job creation and a strong stable economy. Therefore, we believe growth opportunities exist for American manufacturers who demonstrate best practices and strive to compete."

Computer and Electronic Product Manufacturing
"Today, our business outlook is positive but as in the past, it could change very quickly."