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First Cut: Dallas Fed’s manufacturing index falls into contraction in October

The general business conditions index in the Dallas Fed’s Texas Manufacturing Outlook Survey for October fell to -5.1 after 1.5 in September. It slid lower for a second month in a row and returned to contraction following two months of scant expansion. The six-month expectations index managed to climb up to 2.4 in October from -6.8 in September. The future index reflected continued deep uncertainty about conditions with the uncertainty index not much changed at 12.1 in October after 13.3 in September.

The index is a measure of sentiment on the part of survey respondents rather than calculated from components. It showed that present conditions are viewed negatively and are not anticipated to improve substantially any time soon.

The detail indexes explain the general pessimism. New orders fell to -4.2 in October after 7.1 in September, its first negative reading since -1.1 in October 2016. Order backlogs shrank for a fourth month in a row at -9.4 in October after -2.0 in September and had the most severe contraction since -12.3 in June 2016. Production — which is the Dallas Fed’s “key measure of state manufacturing conditions” — declined to 6.0 in October from 14.7 in September. While the Dallas Fed characterized the pace as “moderating”, it was substantially lower than the prior month. This index was the lowest since 0.3 in July 2016.

The index for employment slowed to 11.0 in October from 18.8 in September, while the average workweek dipped to 4.7 from 5.7. However, wage increases were higher at 22.2 from 17.4. This suggested that manufacturers are still willing to hire and compensate skilled workers in spite of softer conditions.

Delivery times widened to -4.2 in October from 2.3 in September and indicated that goods are moving along the pipeline without obstructions. The finished goods inventory index remained contractionary for a seventh month in a row at -4.5 in October after -6.2 in September. Inventory adjustments downward were less severe without any hint that restocking is going to pick up again.

The index for prices paid was a bit higher at 22.8 in October after 20.3 in September. However, the pace remains overall quite low along with moderation in energy costs. Prices received managed to rise to 4.8 in October from 1.0 in September and was the firmest in seven months. Nonetheless, pricing power remained soft.

The Dallas-ISM equivalent index — calculated from the five components most closely aligned with the ISM Manufacturing Index — was barely in expansion in October at 50.3. While the equivalent index has the weakest correlation with the ISM index among the five District Bank surveys of manufacturing, it is still a solid one. Taken in context with the other reports, it suggested that the ISM Manufacturing Index will remain below the 50-mark for a third month in a row when the report for October is released at 10:00 ET on Friday, November 1.

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