Manufacturing in Texas Region Holds Strong as Oil Prices Teeter

The Federal Reserve Bank of Dallas has released several reports all at once covering the Texas region. Included in the reports were the Texas Manufacturing Outlook Survey, the Texas Service Sector Outlook Survey and the Texas Retail Outlook Survey. According to the Dallas Fed, the data used for these reports were collected between October 13 and October 21 and came from 110 Texas manufacturing outfits which responded to its survey.

The good news is that Texas factory activity expanded for the fifth consecutive month in October. The bad news is that this recovery was following a record contraction in activity due to the COVID-19 pandemic.

Business executives who responded generated a 3 point rise in the key production index to a reading of 25.5 in October. Other measures of manufacturing activity also pointed to stronger growth.

The new orders index rose by points to 19.9, while the growth rate of orders index ticked up to 14.3 in October. Another gain was seen in the capacity utilization index, from 17.5 in September to 23.0 in October. Monday;s report also showed that the shipments index was little changed at 21.9.

The index strength may be a positive for what has been happening with manufacturers, but crude oil prices were last seen down $1.31 to $38.54 per barrel on Monday afternoon. Many oil companies need oil to be handily above $40 per barrel for their capital spending projects to be counted on. Another issue to consider ahead is that the number of energy mergers in the hopper today may necessitate companies to look and see what it is that they are actually acquiring within the companies beyond additional reserves before they aggressively buy new equipment that would require manufacturing.

According to the commentary, perceptions of broader business conditions continued to improve over October. The Fed indicated that its general business activity index climbed above average to hit a 2-year high of 19.8, while the company outlook index rose by 3 points to 17.8. Unfortunately, uncertainty regarding companies’ outlooks continued to rise and that index rose 4 points to 11.0.

Data further showed that labor market measures indicated continued but slower growth in employment and work hours while prices and wages increased in October. Expectations regarding future activity remained positive in October. Other measures of future manufacturing activity showed mixed movements but remained solidly in positive territory. These were shown as follows:

  • The employment index remained positive but with less robust hiring as the index fell from 14.5 to 8.7.
  • 27% of firms noted net hiring, while 11% noted net layoffs.
  • The hours worked index remained positive but moved down from 6.9 to 3.7.
  • The raw materials prices index rose by 3 points to 29.4.
  • The finished goods prices and wages and benefits indexes rose to 6.8 and 16.5.
  • The future production index held steady at 47.2.
  • The future general business activity index was unchanged at 28.4.

While the market has never paid much attention to the Texas manufacturing data as an overall economic indicator, it is no secret that this covers much of where the oil and gas sector’s equipment and infrastructure manufacturing needs are serviced.

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