Texas Economy

Texas Manufacturing Outlook Survey

May 29, 2018

Texas Manufacturing Expansion Accelerates Notably

What’s New This Month

For this month’s survey, Texas business executives were asked supplemental questions on the labor market, wages and prices. Results for these questions from the Texas Manufacturing Outlook Survey (TMOS), Texas Service Sector Outlook Survey (TSSOS) and Texas Retail Outlook Survey (TROS) have been released together. Read the Special Questions results.

Texas factory activity rose markedly in May, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, increased 10 points to a 12-year high of 35.2, signaling further acceleration in output growth.

Most other indexes of manufacturing activity also indicated a sharp acceleration in May. The capacity utilization index rose notably from 18.7 to 32.2, and the shipments index jumped 20 points to 39.5. Demand growth picked up as the growth rate of orders index increased eight points to 26.5. All three measures reached their highest readings since 2006. Meanwhile, the new orders index held steady at 27.7.

Perceptions of broader business conditions were even more positive in May than in 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 in employment and notably longer work hours in May. The employment index pushed up six points to 23.4, its highest reading in six years. Twenty-nine percent of firms noted net hiring, compared with 5 percent that noted net layoffs. The hours worked index shot up nine points to 23.2.

Price and wage pressures remained highly elevated in May. 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.

Expectations regarding future business conditions remained largely optimistic in May. The indexes of future general business activity and future company outlook were largely unchanged at 30.0 and 35.2, respectively, with both readings significantly above average. Most other indexes for future manufacturing activity pushed further into positive territory.

Next release: Monday, June 25

Data were collected May 15–23, and 107 Texas manufacturers responded to the survey. The Dallas Fed conducts the Texas Manufacturing Outlook Survey monthly to obtain a timely assessment of the state’s factory activity. Firms are asked whether output, employment, orders, prices and other indicators increased, decreased or remained unchanged over the previous month

Survey responses are used to calculate an index for each indicator. Each index is calculated by subtracting the percentage of respondents reporting a decrease from the percentage reporting an increase. When the share of firms reporting an increase exceeds the share reporting a decrease, the index will be greater than zero, suggesting the indicator has increased over the prior month. If the share of firms reporting a decrease exceeds the share reporting an increase, the index will be below zero, suggesting the indicator has decreased over the prior month. An index will be zero when the number of firms reporting an increase is equal to the number of firms reporting a decrease. Data have been seasonally adjusted as necessary.

May 29, 2018

Results Summary

Business Indicators Relating to Facilities and Products in Texas Current (versus previous month)
Indicator	May Index	Apr Index	Change	Indicator Direction*	Trend** (Months)	% Reporting Increase	% Reporting No Change	% Reporting Decrease
Production	35.2	25.3	+9.9	Increasing	23	45.0	45.2	9.8
Capacity Utilization	32.2	18.7	+13.5	Increasing	23	42.5	47.2	10.3
New Orders	27.7	27.9	–0.2	Increasing	19	40.1	47.5	12.4
Growth Rate of Orders	26.5	18.9	+7.6	Increasing	17	36.0	54.5	9.5
Unfilled Orders	4.1	7.2	–3.1	Increasing	14	15.6	72.9	11.5
Shipments	39.5	19.3	+20.2	Increasing	18	50.4	38.7	10.9
Delivery Time	10.2	14.5	–4.3	Increasing	11	16.6	77.0	6.4
Finished Goods Inventories	–6.6	1.7	–8.3	Decreasing	1	14.2	65.1	20.8
Prices Paid for Raw Materials	44.0	46.3	–2.3	Increasing	27	49.5	45.0	5.5
Prices Received for Finished Goods	20.5	17.0	+3.5	Increasing	22	25.5	69.5	5.0
Wages and Benefits	24.3	29.3	–5.0	Increasing	106	25.3	73.7	1.0
Employment	23.4	17.8	+5.6	Increasing	17	28.5	66.4	5.1
Hours Worked	23.2	14.3	+8.9	Increasing	19	28.4	66.4	5.2
Capital Expenditures	21.7	23.9	–2.2	Increasing	21	26.6	68.5	4.9

General Business Conditions Current (versus previous month)
Indicator	May Index	Apr Index	Change	Indicator Direction*	Trend** (Months)	% Reporting Improved	% Reporting No Change	% Reporting Worsened
Company Outlook	28.0	23.6	+4.4	Improving	21	35.1	57.8	7.1
General Business Activity	26.8	21.8	+5.0	Improving	19	32.5	61.8	5.7


Indicator	May Index	Apr Index	Change	Indicator Direction*	Trend** (Months)	% Reporting Increase	% Reporting No Change	% Reporting Decrease
Outlook Uncertainty†	–2.9	12.4	–15.3	Decreasing	1	15.4	66.3	18.3

Business Indicators Relating to Facilities and Products in Texas Future (six months ahead)
Indicator	May Index	Apr Index	Change	Indicator Direction	Trend* (Months)	% Reporting Increase	% Reporting No Change	% Reporting Decrease
Production	58.0	52.3	+5.7	Increasing	111	63.2	31.6	5.2
Capacity Utilization	51.0	49.0	+2.0	Increasing	111	56.7	37.6	5.7
New Orders	48.5	47.6	+0.9	Increasing	111	53.1	42.3	4.6
Growth Rate of Orders	37.7	37.8	–0.1	Increasing	111	41.6	54.5	3.9
Unfilled Orders	13.8	15.5	–1.7	Increasing	32	19.4	75.0	5.6
Shipments	49.2	49.2	0.0	Increasing	111	56.5	36.2	7.3
Delivery Time	13.4	11.4	+2.0	Increasing	18	18.5	76.4	5.1
Finished Goods Inventories	11.9	11.1	+0.8	Increasing	7	20.8	70.3	8.9
Prices Paid for Raw Materials	51.9	49.1	+2.8	Increasing	110	53.9	44.1	2.0
Prices Received for Finished Goods	27.0	33.3	–6.3	Increasing	28	30.0	67.0	3.0
Wages and Benefits	50.6	50.1	+0.5	Increasing	168	51.0	48.6	0.4
Employment	37.6	35.4	+2.2	Increasing	66	44.4	48.8	6.8
Hours Worked	13.9	14.4	–0.5	Increasing	24	18.4	77.1	4.5
Capital Expenditures	32.2	31.0	+1.2	Increasing	102	36.2	59.8	4.0

General Business Conditions Future (six months ahead)
Indicator	May Index	Apr Index	Change	Indicator Direction*	Trend** (Months)	% Reporting Increase	% Reporting No Change	% Reporting Worsened
Company Outlook	35.2	37.1	–1.9	Improving	28	41.7	51.8	6.5
General Business Activity	30.0	31.9	–1.9	Improving	24	36.4	57.2	6.4

*Indicator direction refers to this month's index. If index is positive (negative), indicator is increasing (decreasing) or improving (worsening). If zero, indicator is unchanged.

**Number of months moving in current direction.

†Added to survey in January 2018.

Data have been seasonally adjusted as necessary, with the exception of the outlook uncertainty index which does not yet have a sufficiently long time series to test for seasonality.

May 29, 2018

Production Index

May 29, 2018

Comments from Survey Respondents

These comments are from respondents' completed surveys and have been edited for publication.

Chemical Manufacturing

Wages and competition for skilled workers are getting to be major concerns.

Primary Metal Manufacturing

A supplier plant shutdown has lowered the feedstock into the plant in May.
We are being impacted by major raw material increases as a result of the Commerce Department’s sanctions and tariffs on aluminum. There is not enough domestic production of primary aluminum or extrusion billet to satisfy current demand in the United States. It will take months—possibly up to two years—before domestic production can be increased, and due to political uncertainties, it is uncertain whether companies will increase or turn on idled production. The current administration is considering quotas on imported raw aluminum, which would cause even more shortages. Bottom line—manufacturing jobs will be lost and production curtailed if the current situation continues. Our uptick in business is artificially driven, with customers concerned about future supply curtailments.
The volume of business is more than we can do within normal lead times, so our lead times are extending and almost double what they were three months ago.

Fabricated Metal Product Manufacturing

Our company is beginning to see oil and gas customers coming back strong and strengthening our backlogs. General business activity is good. Aluminum and steel price increases are driving us to raise prices to customers, who are not happy about those increases. Therefore, customers begin shopping our new prices, which creates a period of uncertainty with the customer relationships. Conversely, we are seeing increases in our requests to quote new opportunities because other suppliers/competitors are raising their prices, too.
Tariffs on steel, aluminum and soft woods have increased prices, regardless of whether the tariff actually exists. Businesses will use any excuse to raise prices if they can. Fuel has been increasing steadily, primarily gasoline, followed by diesel. Fortunately for our business, natural gas—which is used in the production of glass and aluminum—has remained steady, thus keeping surcharges stable. Wages continue to rise as the pool of potential employees has all but evaporated. With the growth in Texas, along with the changes in immigration, hiring has become a full-time endeavor here. Interest rates increasing are probably the largest threat on the horizon. Since we are tied to the housing and remodeling industries, our market is interest rate sensitive. Even though rates are still near historic lows, I see current rates as the new standard. When I was young, the standard was 12 percent roughly, so a 1–2 percent increase raised concerns. Well, with a new standard of 3–4 percent, a 1–2 percent increase in the next 18 months is going to be severe, in my opinion. Interest rates have been so low for so long, most people do not understand how higher rates can change their lives. To summarize, business is stable, but there are problems everywhere.
We are being covered up with quotes but are not seeing project starts and backlog increases.

Machinery Manufacturing

Business remains strong and continues to grow. It is a great business environment.
We are hopeful the rise in oil prices will bring us some much-needed work. We are cautiously optimistic.
Rising metals costs and rising freight costs are concerns going forward.

Computer and Electronic Product Manufacturing

Electronic component lead times and allocations are affecting the ability to deliver.

Printing and Related Support Activities

We have gotten lucky and landed a couple of nice, big orders that are keeping us busy. We are worried about pressure to raise wages, combined with having to pay more for raw materials, yet not seeming to be able to pass along price increases easily.
The impacts of Hurricane Harvey are still a drag on the retail economy.

Food Manufacturing

Stainless steel prices have increased due to tariff restrictions, and the possible purchase price per unit has decreased.

Miscellaneous Manufacturing

We are having one of the best years in company history. Now, if we can hire our open positions and produce all the products we could sell, it would be even more amazing. We want to keep America open for global trade. It does worry us about the potential of losing access to, or supply from, certain overseas markets, but the risk is worth it if we are going to negotiate more fair terms. We are supportive of short-term pain and volatility for a better long-term competitive position and a stronger America.

Historical Data

Historical data can be downloaded dating back to June 2004.

Indexes

Download indexes for all indicators. For the definitions of all variables, see Data Definitions.

Unadjusted

Seasonally adjusted

All Data

Download indexes and components of the indexes (percentage of respondents reporting increase, decrease, or no change). For the definitions of all variables, see Data Definitions.

Unadjusted

Seasonally adjusted

Questions regarding the Texas Manufacturing Outlook Survey can be addressed to Emily Kerr at emily.kerr@dal.frb.org.