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First Cut: Dallas Fed’s manufacturing general business conditions struggle in May

The general business conditions (GBC) index in the Dallas Fed’s Texas Manufacturing Outlook Survey fell to -5.3 in May after slipping to 2.0 in April. The outlook for conditions six months from now declined to 9.1 after 18.4 in the prior month. There was also sharply increased uncertainty in the index reading of 16.1 for May from 6.8 in April. The deterioration in business conditions and expectations are closely tied to the increased risks in trade and tariff policy. A year ago when punitive tariffs were put in place, uncertainty saw a similar spike. However, at that time conditions were broadly seen as much stronger. It raises the question as to whether the regional factory sector can ride out another series of disruptions in the form of higher costs and disrupted supply chains.

 

The GBC is not computed from component subindexes.  Conditions remained expansionary for new orders, shipments, employment, the workweek, and delivery times. These all point to at least modest expansion and a strong labor market. However, order backlogs contracted further, as did inventories.

Prices paid were about unchanged in May at 7.4 from 7.9 in April, which prices received fell to 0.7 from 6.0. At a time when there is little upward pressure on input costs, price power for businesses has declined.  Although it is usually energy costs that drive prices, like the same time last year, higher tariffs are going to be felt quickly and substantially.

The Dallas-ISM equivalent index calculation is at 52.1 for May, essentially unchanged from 52.3 in April. The Dallas-ISM correlation is the weakest of the five District Bank surveys of manufacturing. However, this month’s reading is in line for slower expansion with those from New York and Kansas City, while the Philadelphia survey which has the strongest correlation points to a modest increase. The bottom line is that there does not appear to be much prospect of any notable pick up in activity at the national level when the May ISM Manufacturing Index is published at 10:00 ET on Monday, June 3.

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