Texas manufacturing slipped back into contraction in July, with the general business activity index falling 2.7 points to minus 1.8. The decline mainly reflected a drop of 6.0 points in the production index to 15.3.

Other measures of manufacturing activity, however, indicated some improvement or accelerated expansion. New orders entered expansion territory for the first time in six months and were up 9.4 points to 5.8. Unfilled orders rose 6.9 points to minus 5.1, while shipments rose 11.5 points to 14.2. Finished goods inventories were up 15.0 points to 3.8, and delivery times rose 10.1 points to 2.3.

Employment growth edged up 0.4 points to 8.8, while hours worked rose 7.3 points to 15.0. and wages & benefits were up 2.2 points to 15.4.

On the inflation front, both input costs and output prices rose, with the index for prices paid for raw materials up 2.0 points to 43.7 while prices received for finished goods rose 4.0 points to 15.1.

Expectations regarding future business conditions were close to neutral though slightly less optimistic than in June. The index of future general business activity fell 2.7 points to minus 1.8, while the index of future company outlook was down 1.4 to 3.3.

Responding to special questions on tariffs, 71.6 percent of responding firms said they were negatively impacted by tariffs and 63.6 percent said they have already taken action to pass cost increases through to customers. Only 23.5 percent of companies said they expected to pass through all of the tariff costs to customers; 38.2 percent would pass through most of the costs, while 38.2 percent would pass through some. Most respondents (78.6 percent) do not expect higher tariffs to impact their business over the remainder of the year.

The Dallas Fed Manufacturing Survey tracks factory activity in Texas on a monthly basis. Firms are asked whether output, employment, orders, prices and other indicators increased, decreased or remained unchanged over the previous month. Responses are aggregated into balance indexes where positive values generally indicate growth while negative values generally indicate contraction. About 100 manufacturers regularly participate in the survey.

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.