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First Cut: Dallas Fed manufacturing general business conditions contract further, but details a little more positive than the headline

The general business conditions index in the Dallas Fed’s Texas Manufacturing Outlook Survey remained in contractionary territory for a second month, turning lower to -12.1 in June after -5.3 in May. This was the lowest since -17.1 in June 2016. The index for future conditions fell to -2.7 in June after 9.1 in May, and was the lowest since April 2015 when the index was at -4.7. The index for uncertainty reached a series high of 21.6, surpassing the second highest reading of 19.9 in September 2018. The index is not computed from components. Rather, it is how survey respondents perceive conditions. At the moment, the outlook is fairly bleak, especially after the solid performance of 2018.

The survey’s subindexes, while less robust in tone than in recent months, do not echo the sharp declines in the headline index.

In June, new orders were up to 3.7 after 2.4 in May, while unfilled orders rose to 3.4 after -1.6 in the prior month. Orders and orders in the pipeline are by no means booming, but are continuing to be placed on the books. Shipments in June slowed to 1.7 after 7.6 in May, still growth slightly. Employment dipped to 8.8 in June from 11.6 in May and the workweek was down to 4.7 after 6.4. Businesses were hiring at a modest pace and the workweek continued to rise mildly. Delivery times slowed to -0.3 in June, a fairly sharp narrowing from 6.5 in the prior month, although that was due in part to advancing orders to get ahead of tariffs. Inventories contracted for a third month in a row, but the pace was little changed at -6.1 in June after -6.2 in May. Businesses have responded quickly to signs of moderation in activity.

The index for prices paid was up to 16.4 in June after 7.4 in May, hinting that recent declines in energy costs may have leveled off and that other materials prices were pushing costs up again, although increases remained modest. Pricing power was limited in June with the prices received index at 1.2 after 0.7 in May.

The Dallas-ISM equivalent index was at 51.5 in June after 52.1 in May. The correlation with the ISM Manufacturing Index is among the weaker of the District Bank surveys. However, it does point to only a small decrease for the national report from the 52.1 reading in May. Taken in context with the behavior of the New York and Philadelphia equivalents, at best the ISM Manufacturing Index will remain consistent with slight expansion.

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