Texas Manufacturing Faces Sharp Decline, Index Drops 19.5 Points

The Dallas Federal Reserve's April Manufacturing Outlook Survey revealed a significant decline in overall business activity, with the index plummeting to -35.8, the lowest level since May 2020. This marked a 19.5-point drop from the previous month and the third consecutive month of decline, reflecting a growing pessimism among businesses about the overall economic environment. The survey indicated that despite the weak overall business sentiment, manufacturing output in Texas continued to grow in April. The production index remained steady at 5.1, indicating a slight expansion in manufacturing activity. However, other indicators of manufacturing activity showed signs of contraction. The new orders index plummeted 20 points to -20.0, the lowest level this year. The capacity utilization index fell to -3.8, and the shipments index turned negative for the first time this year, dropping from 6.1 to -5.5, further highlighting the weakness in demand.

Businesses' outlook on future operating conditions also deteriorated significantly. In April, the company outlook index fell to -28.3, the lowest level since the start of the COVID-19 pandemic, while the uncertainty index rose 11 points to 47.1, indicating a significant increase in uncertainty about the future. On the employment front, labor market indicators showed a slight decrease in hiring this month. The employment index remained stable at -3.9, with 9% of firms reporting net hiring and 13% reporting net layoffs. The workweek index fell from -2.9 to -6.4, indicating a reduction in average work hours. On the pricing front, input cost pressures intensified in April. The raw materials price index surged 11 points to 48.4, the highest level since mid-2022. The finished goods price index also rose 9 points to 14.9, above the long-term average. In contrast, the wages and benefits index remained steady at 14.3, slightly below the historical average, indicating stable wage growth.

Texas, a key pillar of U.S. manufacturing, generated approximately $296 billion in manufacturing output in 2023, accounting for about 11% of the nation's total manufacturing output. In terms of manufacturing scale, Texas ranks second in the U.S., behind California, and is the top state in the U.S. for manufacturing exports. Texas plays a crucial role in the U.S. refining industry, producing large quantities of oil and coal products. Additionally, Texas contributes more than 13% of the nation's chemical product output and over 10% of non-metallic mineral products (such as bricks, glass, and cement).

Looking ahead, the outlook for Texas manufacturing remains challenging. The six-month general business activity index fell to -15.2, the lowest level of 2023. While the future production index remains positive, it declined 13 points to 14.8, indicating weakening expansion momentum. Most indicators of future manufacturing activity, while still in the expansion range, are significantly below historical averages. This suggests that while there is still some growth, the pace of expansion is slowing down, and businesses are becoming more cautious about the future. The decline in the business activity index and the increase in uncertainty reflect the broader economic challenges facing the manufacturing sector in Texas. The drop in new orders and shipments indicates a weakening demand, which could further impact production and employment in the coming months. The intensifying input cost pressures add to the challenges, as businesses may struggle to pass on higher costs to consumers without affecting their competitiveness. Overall, the survey paints a picture of a manufacturing sector facing significant headwinds, with businesses grappling with economic uncertainty, weakening demand, and rising costs.