Texas manufacturing activity rises notably in May, says Dallas Fed survey

For Immediate Release: May 29, 2018

DALLAS—Texas factory activity accelerated in May, according to the Federal Reserve Bank of Dallas’ Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, rose 10 points to a 12-year high of 35.2.

 “The Texas manufacturing sector expanded at a red-hot pace in May, with most key indexes reaching highs last seen in 2006—a banner year for the state economy,” said Emily Kerr, Dallas Fed senior business economist. “Employment growth picked up, with nearly 30 percent of firms noting net hiring this month. Price pressures remain highly elevated, as these survey measures are at levels well above average and also above levels seen last year.”

This month, business executives from both manufacturing and service sector firms were asked special questions on the labor market, wages and prices. Responses revealed:

• Roughly 70 percent of Texas firms surveyed said they are having problems finding qualified workers when hiring; this is up from 65 percent in February.
• Increasing wages is now the top strategy that firms are using to recruit and retain employees, eclipsing more intensive recruiting efforts among others.
• Firms expect to have to raise wages more this year than last year and for selling prices to accelerate as well.
• Responding firms expect 2018 wages and input prices to be up 4.4 percent and 4.8, respectively, on average, while expecting to increase selling prices by 3.5 percent on average.

 “These results echo what our regular survey results have shown—that wage and price inflation has picked up this year,” Kerr said. “But it’s unique to have firm-level data on annual percent changes, and looking at those averages puts an even finer point on what’s happening. Firms expect to raise wages more than 4 percent this year, on average, with service sector executives noting more wage pressure than manufacturers.

“At the same time, manufacturers expect much higher input price increases this year—over 6 percent on average—and respondents’ comments suggest the new tariffs on steel and aluminum are a significant contributor,” Kerr said. “Across the board, Texas firms expect to raise selling prices this year by 3.5 percent on average, well below the expected rates of wage and input price increases.”

Here are some additional key takeaways from this month’s report:

Most indexes of manufacturing activity rose sharply in May. The capacity utilization index rose from 18.7 to 32.2, and the shipments index jumped 20 points to 39.5. The growth rate of orders index increased eight points to 26.5.

Perceptions of broader business conditions were even more positive in May than April. The general business activity index rose five points to 26.8, and the company outlook index rose four points to 28.0. These readings are far above their respective averages.

Labor market measures suggested stronger growth. The employment index pushed up six points to 23.4, its highest reading in six years. The hours worked index shot up nine points to 23.2.

Price and wage pressures remained highly elevated. The raw materials prices index and wages and benefits index edged down to 44.0 and 24.3, respectively—still well above their average readings. The finished goods prices index moved up to 20.5, with a quarter of firms noting that prices rose this month.

Manufacturers remained largely optimistic about future business conditions. The indexes of future general business activity and future company outlook were mostly unchanged at 30.0 and 35.2, respectively, with both readings significantly above average.

Texas produces more than 11 percent of total manufactured goods in the United States, ranking second behind California in factory production.

The Dallas Fed conducts the Texas Manufacturing Outlook Survey monthly to obtain a timely assessment of the state’s factory activity.

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Media contact:
Jennifer Chamberlain
Federal Reserve Bank of Dallas
Phone: (214) 922-6748
E-mail: jennifer.chamberlain@dal.frb.org