After two straight months of improvement, manufacturing activity in the Dallas region took a turn for the worse in August. While economists were expecting the headline Dallas Fed Manufacturing Index to show a slight improvement to -4.0 versus last month’s level of -4.6, the actual reading was much worse than expected at -15.8 and brings the headline index of current conditions back near its recent lows. Like the current conditions index, the headline index for conditions six months from now also declined this month, falling from 18.8 down to 3.4, but still remained slightly positive.
The table below shows a breakdown of the Dallas Fed Manufacturing report by each of the index’s subcomponents and shows their change relative to July. In this month’s report, it is a sea of red. As far as current conditions are concerned, all but four components are in the red. That being said, the majority of components did see positive m/m changes in August. The biggest increases came in Hours Worked, Capacity Utilization, and Wages and Benefits, which is a positive indicator of labor trends in the region. On the downside, the biggest declines were in Inventories of Raw Materials and New Orders.
Like the headline index for the six-month outlook, the majority of its sub-components are still in positive territory with the only negative readings coming in Delivery Times and both categories of Inventories. While the components are positive, though, all but one (Wages and Benefits) saw a decline on a month over month basis. The components that saw the largest m/m declines were in Company Outlook, Capacity Utilization, and New Orders.
Finally, putting this all together and seeing how the current trend in each category stands relative to prior periods, in the chart below we have created a diffusion index which shows the six-month average in the net number of categories showing m/m improvement or weakness. For current conditions (blue line), our diffusion index has now moved back into positive territory and is now back at its highest levels since last August. In terms of the six-month outlook, the diffusion index dropped down from its highest levels since January 2013 to a level of 1.67. Last month, it appeared as though manufacturers were thinking the worst of the recent energy fueled downturn was behind them. Obviously, that wasn’t the case as oil continued to plunge during most of August. Closing out the month, though, crude oil has rallied more than 20% in a matter of three trading days. If the oil rebound can hold, sentiment in the Dallas area should improve once again.