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First Cut: Dallas general business conditions expand in February after five months of contraction

The Dallas Fed’s Texas Manufacturing Outlook Survey for February put the general business conditions index at 1.2 after -0.2 in January and was the first positive after five months of shallow contraction. The index for future business conditions broke substantially higher at 18.0 in February after 7.6 in January. If uncertainty was higher at 11.0 after 2.7, it was mainly on the as-yet rather nebulous concerns related to impacts from the spread of COVID-19. As side from that, worries surrounding the risks to the economic outlook are low. The report adds to the evidence that the downturn for the factory sector likely bottomed in December and has begun to expand again at the start of 2020.

While the index for new orders was down to 8.4 in February from 17.6 in January, the prior month reflected an unsustainable uptick.  The February reading is probably closer to the underlying pace and consistent with modest expansion. The index for new orders improved for a fourth month in a row and managed to eke out a gain to 0.5 in February. It was the first positive since June 2019. Production responded to firming orders and ramped up to 16.4 in February from 10.5 in January. It was the highest in 17.9 in August 2019.

Delivery times narrowed for the first time in five months at 2.6 in February after -3.0 in January. This was not a substantive slowdown in orders but suggested that overall activity was up for the factory sector. Inventories declined a bit to -5.5 in February from -3.5 in January as diminished stocks on hand were drawn down further. Some rebuilding is likely as activity accelerates.

The index for employment was -0.9 in February after 1.9 in January and the first negative since -3.0 in December 2016. Some of this is due to a lack of qualified workers and some is an artifact of slower conditions that kept businesses from hiring. However, for those workers hired, the index for wages was up to 22.6 in February after 16.3 in January and the highest in seven months. Modest upward pressure on wages was a bit firmer as the downturn in manufacturing eased. Slower payroll growth meant that the workweek expanded to meet new demand. The index for the average workweek rose to 2.1 in February after -0.2 in January.

The index for prices paid showed only slight movement higher at 12.8 in February after 9.5 in January and probably was in part accounted for by soft energy costs. The index for prices received improved, but only to -0.1 in February after -1.9 in January. There is little pricing power for the District’s manufacturers at present.

The Dallas-ISM equivalent index was about unchanged at 52.1 in February from 52.4 in January. The index pointed to another month of narrow expansion for the factory sector when the ISM Manufacturing Index for February is reported at 10:00 ET on Monday, March 3.

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