Contraction in Texas Factory Activity Deepened in February — Dallas Fed

Factory activity in Texas contracted in February for the 10th straight month as weak demand weighed on production, according to data released Monday by the Federal Reserve Bank of Dallas.

The index for general business activity of the Texas Manufacturing Outlook Survey decreased to minus 13.5 in February from minus 8.4 in January, missing the minus 9.5 consensus forecast from economists provided by FactSet.

The indicator suggests business activity in Texas contracted in February at a sharper pace than the previous month as the reading came in further below zero.

The production index–a key measure of state manufacturing conditions–also fell, to minus 2.8 in February from 0.2 a month earlier, suggesting a modest contraction in output for the first time since May 2020.

Activity was subdued due to weakening demand, according to the survey. The new orders index fell to minus 13.2 from minus 4.0, and the growth rate of orders index declined to minus 16.9 from minus 12.3. Both indicators suggest the contraction in orders deepened in February.

“We have seen a slowing the last two quarters and expect the same moving forward,” said one respondent from the paper manufacturing industry.

The employment index fell sharply to minus 1.0 from 17.6 a month earlier, dipping below zero after tracking above average for more than two years. Around 15% of firms reported net hiring, while 16% noted net layoffs, the Dallas Fed said.

Price and wage pressures increased in February. The raw materials prices index rose to 25.1 from 20.5, and the finished goods prices index rose to 15.8 from 9.9. Both indicators suggest inflation pressures intensified at factory gates.

Meanwhile, the wages and benefits index rose to 32.7 from 30.5, remaining above average and pointing to still firm pay growth.

“We do believe that the second half of 2023 will see a general reduction in business levels but no contraction of pricing,” said a respondent from the transportation equipment manufacturing sector.

Firms’ views over the short-term outlook improved somewhat in February, but remained broadly pessimistic. The future general business activity index increased to minus 2.9 from minus 9.1. Still, the future production index rose to 21.3, signaling output growth is expected over the next six months, The Dallas Fed said.