Fed Reports Growth in Texas Manufacturing Activity with Slowing Demand in May

The Dallas Fed’s monthly Texas Manufacturing Outlook Survey showed growth in manufacturing activity for May 2022 against the backdrop of a wider U.S. economy that saw inflation hit a 40-year high of 8.6 percent that month. The survey, however, indicated a fall in demand and a worsening business outlook. The May survey also included supplemental questions on supply-chain disruptions that show the Texas manufactures have experienced supply chain disruptions and expect them to continue through the end of the year. May and June have also seen record oil and gas prices that continue to buoy the Texas economy and manufacturing tied to the oil and gas industry. Prices are expected to remain elevated into 2023 even if the larger U.S. economy slows more quickly based on the actions of the Federal Reserve Bank to quell inflation.

The state’s production index and capacity utilization and shipments indexes rose and remained positive, indicating growth in manufacturing. Demand, however, was lower, as both the new orders index and the growth rate of orders index fell to their lowest levels in two years. The new orders index fell but remained in positive territory, while the growth rate of orders index fell into negative territory, indicating contraction. The general business activity index and the company outlook index both fell into the negative, signaling a worsening perception of business conditions. The outlook uncertainty index remained unchanged.

Growth in employment slowed, as the employment index fell. Thirty-one percent of firms noted net hiring, while 11 percent noted net layoffs. The hours worked index remained elevated but fell slightly. Prices and wages, however, continued to increase. The raw materials prices index and the finished goods prices index were unchanged but at highly elevated levels.

Expectations regarding future manufacturing were mixed but generally less optimistic than in April. The future production index remained positive but fell to below average. The future general business activity index fell into negative territory for the first time in two years. Other measures of future manufacturing activity showed mixed movements but remained solidly in positive territory.

Supply-Chain Issue

In the supplemental questions on supply-chain disruptions and costs, almost 65 percent of respondents reported experiencing supply-chain disruptions or delays, up slightly from February. The other survey responses indicate that executives believe supply-chain issues will last at least through the end of 2022 and prices will continue to increase.

Most respondents said that supply-chain disruptions or delays had not changed much since February, with 33 percent saying they improved slightly (up from 24.9 percent in February), 30 percent reporting no change (down from 35.6 percent in February), and 30 percent reporting that they had worsened slightly (up from 29.2 percent in February).

Most respondents also expect it to take at least six months for their supply chain to return to normal, with 20.2 percent reporting 4-6 months, 15.5 percent reporting 7-9 months, and 22.3 percent reporting 10-12 months. The largest group of respondents (37.3 percent) expected it to take more than a year.

The vast majority of respondents (84.5 percent) said they are passing increased costs on to their customers through price increases in 2022, with 43.4 percent reporting that they are passing on some of the price increase, 16.5 percent reporting that they are passing on most of the price increase, and only 8.1 percent reporting that they are passing on all of the price increase.

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Authored by Jody Allred, CPA, CISA, CGMA, Brad Jay, CPA, CGMA, and Chris Boyd, CPA.

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