Dallas Fed: Manufacturers Aren’t Thrilled About November


The manufacturing sector has consistently flirted with contraction in the wake of the financial crisis and will need to experience a longer period of more robust growth in order to fully heal and once again become a driving force behind the broader U.S. economy.

Recent data show that while the manufacturing economy has avoided a contraction for the past three months, the growth can hardly be called robust. Research firm Markit’s chief economist, Chris Williamson, described November’s expansion as “reasonable but unspectacular.” Both Markit’s Flash U.S. Manufacturing Purchasing Managers’ Index, or PMI, and the Federal Reserve Bank of Dallas’s Texas-area manufacturing survey put factory output on similar trajectories this month.

On the surface, the news was good: Growth in Texas factory activity strengthened for a third consecutive month in November. In this case, the use of the term “strengthen” means that the survey’s headline index — its gauge of general business activity — remained in positive territory. Yet the pace of growth did not expand, but slowed. In general, the Texas-area manufacturers surveyed indicated that the economy barely grew even though their companies did better this month.

The Texas Manufacturing Outlook Survey, conducted on a monthly basis, interviews manufacturers across Texas, southern New Mexico, and northern Louisiana to compile the report, which provides important insight on the strength of the manufacturing economy as a whole, because Texas produces more than 11 percent of all goods made in the United States. Only California has a larger manufacturing sector. Data for this month’s survey were collected between November 12 and November 20 from 85 Texas-area manufacturers.

Source: Dallas Federal Reserve

Source: Dallas Federal Reserve

November’s reading of general business activity showed that the key index dropped from 3.6 in October to 1.9. Economists had been expecting the measure to jump to a reading of 5. However, the index did remain in expansion territory — any reading above zero indicates growth, and it was the sixth consecutive positive reading. More encouraging for the manufacturing economy, was that other indexes showed far more substantial growth.

The production index, a measure of state manufacturing, rose from 13.3 to 16.9, the highest reading in five months. The new orders index came in at 5.4, similar to its October level but representing the seventh consecutive month of increased demand. The capacity utilization index rose to 16.2, its highest level since March 2011, and the shipments index edged up to 14.8.

Perceptions of broader business conditions remained modestly optimistic. The decrease in the general business activity index was accompanied by upward movement in the company outlook index, which posted its sixth consecutive positive reading and increased to a reading of 8.

That reading was the highest recorded since June. Plus, expectations for future business conditions remained optimistic in November. The index of future general business activity remained little changed at a reading of 7, the index of future company outlook rose 5 points to 20.1, and the indexes for future manufacturing activity pushed farther into positive territory, as well.

Labor market indicators also reflected a similar confidence that business conditions would remain conducive to increased business activity: employment expanded and workweeks lengthened. The November employment index was down marginally from the October level but still indicated increased worker head counts. Fifteen percent of surveyed firms reported hiring new workers while 10 percent reported laying off workers.

In addition, the hours worked index remained relatively unchanged at a reading of 4.2, although the reading did suggest the average workweek increased slightly. The wages and benefits index dropped from 20.4 to 14.6, a signal that upward pressure on compensation costs eased modestly this month.

Hurting manufacturers was an upward pressure on prices. The raw materials price index was unchanged at 22.6, with 27 percent of survey respondents noting an increase in input costs. But the finished goods price index remained positive for the fourth straight month, although it did edge down to a reading of 2.2. Looking to the future, 38 percent of executives surveyed expect further material price increased over the next six months, while 33 percent forecast higher finished goods prices.

The Dallas Federal Reserve survey is the last of five regional central bank monthly reports on the factory sector, and so far, the results have been mixed. In particular, the Philadelphia Fed’s manufacturing index slowed to a reading of 6.5 in November, the lowest figure recorded since May.

However, Markit’s PMI “bounced back from the fall seen in October, linked to business returning to normal after the uncertainty and disruption caused by the government shutdown,” said Williamson. “The resilience of the manufacturing economy in the face of headwinds such as the shutdown and fiscal wrangling will add to calls for policy to be tapered. However, the recent drop in inflation to its lowest since October 2009 suggests that the Fed will be in no rush to tighten [monetary stimulus] until the new year, eager instead to see the pace of growth show greater robustness and sustainability.”

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