Texas Manufacturing Growth Slows In September: Dallas Fed Survey

Texas factory activity slowed in September, with the Dallas Fed's general business activity index falling to -8.7 and the production index dropping to 5.2, signaling below-average output growth. New orders and employment also declined, with the employment measure hitting its lowest since April at -3.4. Despite these immediate decelerations and persistent elevated raw material and wage costs, surveyed firms maintain a positive outlook for the next six months, with future activity indexes remaining in positive territory, suggesting anticipated recovery.

Analysis

Texas manufacturing activity decelerated significantly in September, with the Dallas Fed's general business activity index falling into contractionary territory at -8.7. The slowdown was broad-based, evidenced by a 10-point drop in the production index to 5.2, indicating below-average output growth, and a sharp decline in capacity utilization from 13.7 to 3.9. Critically, leading indicators weakened, as the new orders index turned negative at -2.6, and the employment measure hit its lowest reading since April at -3.4, with net layoffs reported. This operational slowdown occurred amid persistent cost pressures, as the raw materials index remained elevated at 43.4. Despite the current weakness, firms maintained a positive, albeit eroding, outlook for the next six months, with all future-looking indices remaining in positive territory. This creates a divergence between the sharp current downturn and a lingering, though less certain, expectation of future recovery.

Key Decisions for Investors

• Investors with exposure to Texas-based industrial and manufacturing firms should monitor for near-term revenue headwinds, given the contraction in both the new orders index (-2.6) and the employment gauge (-3.4).
• With raw material costs remaining elevated (index at 43.4) while finished goods price growth slows (index at 11.7), it is prudent to scrutinize upcoming earnings reports for evidence of margin compression in the sector.
• While the six-month outlook remains positive, the significant deceleration in current activity warrants using this regional report as a potential leading indicator for broader U.S. economic cooling, increasing the importance of upcoming national PMI and employment data.