US: Dallas Fed Mfg Survey

Mon Feb 23 09:30:00 CST 2015

Consensus Consensus Range Actual Previous
Bus Activity Index -2.8 -8.0 to 0.5 -11.2 -4.4
Production Index 0.7 0.7

The latest regional Fed survey on manufacturing points to weakness in the manufacturing sector in February.

Texas factory activity posted a second month of no growth in February, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, remained near zero (0.7) and indicated output was essentially unchanged from January levels.

Other measures of current manufacturing activity reflected contraction in February. The new orders index pushed further into negative territory, coming in at minus 12.2, its lowest reading since June 2009. The shipments index fell to minus 3.3, also reaching a low not seen since 2009. The capacity utilization index turned negative as well, dropping from 5.1 to minus 4.9.

Perceptions of broader business conditions remained rather pessimistic this month. The general business activity index moved further negative to minus 11.2, posting its lowest reading in nearly two years. The company outlook index remained slightly negative and edged down from -3.8 to -4.4.

Labor market indicators reflected only minor employment growth and slightly shorter workweeks. The February employment index moved down from 9 to 1.3. Fifteen percent of firms reported net hiring, compared with 14 percent reporting net layoffs. The hours worked index edged further into negative territory, coming in at minus1.6.

Prices fell slightly in February and upward pressure on wages continued to ease. The raw materials prices index held steady at minus1.7, indicating marginal downward pressure on input costs. The finished goods prices index was also slightly negative but edged up from minus 6.7 to minus 4.4. Manufacturers are no longer expecting sizeable price increases six months ahead, as the indexes of future prices were in single digits this month, down markedly from 2014 readings. The wages and benefits index edged down for a second month in a row and came in at 16.8.

Expectations regarding future business conditions rebounded somewhat in February. The index of future general business activity shot up 12 points to 5.5 after posting a negative reading in January. The index of future company outlook rose nearly 10 points to 11.8, although it remains well below the index level seen throughout 2014. Indexes for future manufacturing activity showed mixed movements in February but remained in solidly positive territory.

The latest Dallas Fed report plays into the hands of the doves on the FOMC. Manufacturing activity is weak and inflation pressures are non-existent currently. It will be interesting to hear Dallas Fed president Richard Fisher's comments in speech since he has been hawkish. Fed chair Janet Yellen will be speaking to Congress this Tuesday and Wednesday and likely will comment on sector strengths and weakness and on price pressures.

Market Consensus Before Announcement
The Dallas Fed general business activity index worsened in January with both the general business activity index and the company outlook index dropping below zero for the first time in 20 months. The general business activity index dropped to minus 4.4, and the company outlook index fell 13 points, coming in at minus 3.8. Texas factory activity was flat in January. The production index, a key measure of state manufacturing conditions, came in at 0.7, indicating output was essentially unchanged from December.

The Dallas Fed conducts this monthly survey of manufacturers in Texas regarding their operations in the state. Participants from across the state represent a variety of industries. In the latter half of the month, the questions for the manufacturing survey are electronically transmitted to respondents and answers are collected over a few days. About 100 manufacturers regularly participate in the Dallas Fed survey, which began collecting data in mid-2004. Participants are asked whether various indicators have increased, decreased or remained unchanged. Answers cover changes over the previous month and expectations for activity six months into the future. The breakeven point for each index is zero with positive numbers indicating growth and negative numbers reflecting decline.

Investors track economic data like the Dallas Fed Manufacturing Survey to understand the economic backdrop for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers a moderate growth environment that will not generate inflationary pressures. The Dallas Survey gives a detailed look at Texas' manufacturing sector, how busy it is and where it is headed. Since manufacturing is a major sector of the economy, this report can have a big influence on the markets. Some of the survey indexes also provide insight on inflation pressures -- including prices paid, prices received, wages & benefits, and capacity utilization. The Federal Reserve closely watches this report because when inflation signals are flashing, policymakers can reset the direction of interest rates. As a consequence, the bond market can be highly sensitive to this report. The equity market is also sensitive to this report because it is an early clue on the nation's manufacturing sector, reported in advance of the ISM manufacturing index and often in advance of the NAPM-Chicago index.