Dallas Fed: Texas manufacturing activity still weak

Texas factory activity was unchanged in August, according to business executives responding to the Texas Manufacturing Outlook Survey, released August 30 by the Federal Reserve Bank of Dallas. The production index, a key measure of state manufacturing conditions, came in at zero, posting a third consecutive month of little to no growth.

Most other indexes for current activity remained negative in August. The new orders index stayed at –9, implying incoming orders continue to fall. The capacity utilization and shipments indexes pushed deeper into negative territory, suggesting further contraction of business.

The general business activity index was negative for the third month in a row, but advanced in August as the share of respondents reporting improved activity rose from 10 to 15 percent. The company outlook index climbed back into positive territory after being negative for two months, as 23 percent of manufacturers said their outlook improved in August, compared with 13 percent in July.

The employment index turned negative for the first time in six months, largely due to the share of firms reporting layoffs rising from 15 percent in July to 23 percent in August, and hours worked contracted again. Wage and benefits costs rose modestly.

The raw materials price index doubled from 12 in July to 24 in August, reflecting a surge in input costs. Twenty-eight percent of manufacturers reported an increase in raw materials prices, while only 4 percent noted a decrease. Finished goods prices fell again in August, although three-fourths of firms reported no change in selling prices. The future indexes for both raw materials prices and finished goods prices were positive and rose.

Most future indexes of manufacturing conditions fell in August, but remained in solid positive territory. The future company outlook index fell from 16 to 9, with 31 percent of respondents expecting an improved outlook six months from now. However, the future general business activity index, a broader measure of economic conditions, dipped into negative territory for the first time in more than a year.

The Dallas Fed conducts the Texas Manufacturing Outlook Survey monthly to obtain a timely assessment of the state’s factory activity. Data were collected August 17–25, and 99 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: September 27, 2010

Company Business Indicators Relating to Facilities and Products in Texas Current

Indicator Aug Index Jul Index Change Indicator Direction* Trend** (months) % Reporting Increase % Reporting No Change % Reporting Decrease Production -0.1 4.9 -5.0 Decreasing 1 25.5 48.9 25.6 Capacity Utilization -3.1 -0.6 -2.5 Decreasing 2 21.7 53.5 24.8 Volume of New Orders -9.3 -9.6 +0.3 Decreasing 3 23.4 43.8 32.7 Growth Rate of Orders -13.2 -9.9 -3.3 Decreasing 3 17.5 51.8 30.7 Unfilled Orders -4.6 -7.6 +3.0 Decreasing 3 13.0 69.4 17.6 Volume of Shipments -3.4 -1.1 -2.3 Decreasing 3 22.7 51.2 26.1 Delivery Time -4.0 -6.0 +2.0 Decreasing 3 9.1 77.8 13.1 Materials Inventories -9.1 -6.1 -3.0 Decreasing 4 16.2 58.6 25.3 Finished Goods Inventories -8.2 -7.0 -1.2 Decreasing 5 12.2 67.3 20.4 Prices Paid for Raw Materials 24.3 12.3 +12.0 Increasing 13 28.3 67.7 4.0 Prices Received for Finished Goods -5.7 -11.4 +5.7 Decreasing 3 9.2 75.9 14.9 Wages and Benefits 7.1 8.0 -0.9 Increasing 9 10.1 86.9 3.0 Employment -5.1 5.1 -10.2 Decreasing 1 17.9 59.1 23.0 Average Employee Workweek (Hours Worked) -6.0 -7.0 +1.0 Decreasing 2 15.2 63.6 21.2 Capital Expenditures 1.0 1.0 0.0 Increasing 5 13.4 74.2 12.4

General Business Conditions Current

Indicator Aug Index Jul Index Change Indicator Direction* Trend** (months) % Reporting Improved % Reporting No Change % Reporting Worsened Company Outlook 1.7 -10.4 +12.1 Improving 1 23.4 54.9 21.7 General Business Activity -13.5 -21.0 +7.5 Worsening 3 14.9 56.7 28.4

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

Indicator Aug Index Jul Index Change Indicator Direction* Trend** (months) % Reporting Increase % Reporting No Change % Reporting Decrease Production 24.2 26.6 -2.4 Increasing 18 41.2 41.9 17.0 Capacity Utilization 23.3 20.7 +2.6 Increasing 18 40.0 43.3 16.7 Volume of New Orders 20.8 29.6 -8.8 Increasing 20 37.5 45.8 16.7 Growth Rate of Orders 15.1 25.6 -10.5 Increasing 18 31.3 52.5 16.2 Unfilled Orders 3.1 0.0 +3.1 Increasing 1 14.4 74.2 11.3 Volume of Shipments 23.6 28.2 -4.6 Increasing 18 40.9 41.8 17.3 Delivery Time -7.2 -8.0 +0.8 Decreasing 5 6.2 80.4 13.4 Materials Inventories -9.3 1.0 -10.3 Decreasing 1 16.5 57.7 25.8 Finished Goods Inventories -12.5 -3.0 -9.5 Decreasing 3 10.4 66.7 22.9 Prices Paid for Raw Materials 23.7 20.2 +3.5 Increasing 17 33.0 57.7 9.3 Prices Received for Finished Goods 7.2 0.0 +7.2 Increasing 1 19.6 68.0 12.4 Wages and Benefits 30.9 29.8 +1.1 Increasing 75 31.7 67.5 0.8 Employment 1.0 2.0 -1.0 Increasing 12 19.6 61.9 18.6 Average Employee Workweek (Hours Worked) 2.0 1.0 +1.0 Increasing 18 17.5 67.0 15.5 Capital Expenditures 3.1 1.0 +2.1 Increasing 9 14.6 74.0 11.5

General Business Conditions Six Months Ahead

Indicator Aug Index Jul Index Change Indicator Direction* Trend** (months) % Reporting Improved % Reporting No Change % Reporting Worsened Company Outlook 9.3 15.8 -6.5 Improving 15 30.8 47.7 21.5 General Business Activity -4.3 5.0 -9.3 Worsening 1 18.9 57.9 23.2

*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.

Primary Metal Manufacturing
We have had an overall increase in orders and production over the past few weeks related to market share gains. In general, economic indications are not positive for the major markets we serve, which include building and construction and transportation.

Fabricated Metal Product Manufacturing
We have lowered our pricing to incite business, resulting in very low-margin projects. Clients ask for fast schedules that do not allow for third party production lead time times, and they ask us to store the finished product at no cost, as other vendors or contractors are unable to meet schedules. We have started to charge for storing products.

We are aggressively seeking business in South America.

While many business leaders are speaking about their fears of a "double dip," nonresidential construction is in the third year of volume decline. The volumes include all new construction (high-, medium- and low-rise buildings) measured in square feet in the U.S. Year-over-year declines were significant for 2008 and 2009 and are projected to be significant for 2010 as well. Vacancy rates for the industrial, commercial and retail sectors are only moderately higher than the last down cycle in 2003, while 2010 building activity is much lower than forecasted.

Repeat orders seem consistent and strong. New orders and quote activity has slowed, but this may be due to vacations. There also seems to be continued onshoring of products distributed in North America. The trend continues to use technology to do more with less, use temporary labor to minimize the costs for benefits and taxes associated with hired employees, and limit risk in this unstable economy.

The uncertainty abounding throughout numerous industries and markets, coupled with the evidence of commercial overbuilding, will continue to dampen a significant recovery for building-related firms.

The current tax policy and the drilling moratorium are hurting our business.

Machinery Manufacturing
Business has stabilized, but at a lower level. There is a lot of uncertainty about the timing and rate of improvement.

The capital equipment market for the foodservice industry continues to operate at a low level with little indication that it will improve over the next six to 12 months. We continue to operate at a very low continuous production level. Obtaining additional customers will increase our manufacturing efficiency and have little effect on capacity utilization.

Furniture and Related Product Manufacturing
We are seeing a slow decline in the number of retail stores. However, we are not seeing the return of new stores that is normal for a recovery. Therefore, we feel that we are on the edge of a cliff, waiting to be pulled back or allowed to fall even further.

Food Manufacturing
The price of sugar (sucrose) is a big negative for us.

Nonmetallic Mineral Product Manufacturing
We have seen slight improvements in order volume as a result of increases in multifamily construction. We expect housing to increase slowly beginning in 2011. However, we anticipate that the growth in housing will be slow for the foreseeable future, with housing not reaching normal levels until 2013, provided federal government policy does not interfere with the recovery.