Today’s release of the Dallas Fed Manufacturing survey for the month of July showed some modest improvement relative to June’s reading but missed consensus expectations nonetheless. While economists were forecasting the headline current conditions index to come in at a level of -3.5, the actual reading was just over a point weaker at -4.6. The Dallas area is already a significant enough share of the US economy that the monthly report bears watching, but given the area’s exposure to the energy sector, this report has received increased attention over the last several months in order to gauge how the decline in oil prices is impacting that region’s economy.
The chart below shows the monthly readings in the current General Business Conditions Index (red line) and the six-month outlook for General Business Conditions (blue line). While both indices have seen a notable improvement in the last two months, the six-month outlook has seen a larger jump, rising to its best level since last August. Whether they are being too optimistic or not, manufacturers in the Dallas area seem to think the worst is behind them.
Looking at the internals of the report, the table below breaks down the one month change in 17 different categories covered in the Dallas Fed Manufacturing report. With regards to current conditions, while the majority of categories are still in negative territory, all but a handful are showing improvement. The biggest increases this month came in Inventories of Finished Goods, New Order Growth, New Orders, and Unfilled Orders, which all saw double-digit increases. On the downside, both Prices Paid indices declined as did Wages and Benefits and Employment, so it would seem to imply that inflationary pressures are non-existent in the Dallas area. Looking out over the next six months, not only are all 17 categories positive this month, but 16 of them also improved. The last time we saw such widespread improvement in categories for a single month was in January 2013. Here the biggest improvement came in Unfilled Orders, Company Outlooks, and General Business Activity.
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 is just barely negative now and well off what were the lowest levels since the Financial Crisis. In terms of the six-month outlook, the diffusion index is now up to 3.33, which is the highest level since January 2013. Looking at these numbers, it is clear that manufacturers think the worst of the recent energy fueled downturn is behind them. Whether that turns out to be the case, though, will be highly dependent on the price of oil. On that score, we would note that WTI is currently trading down for a fourth straight day during which it has declined 6.74%, and that decline most likely occurred after these results were compiled.