Texas Manufacturing Growth Slows in October as New Orders Lose Momentum

Texas manufacturing continued to expand in October, but the pace slowed sharply as factories reported a steep drop in the momentum of new orders. The Federal Reserve Bank of Dallas said Monday that its production index fell to 15.8 from 29.5 in September, while the new orders index slipped to 9.3 from 30.7.

Those readings still indicate expansion among the manufacturers surveyed, rather than an outright downturn. Production remained above its long-run average of 9.7, even after the decline. The result points to a cooler month following September’s particularly strong performance, with demand showing a more pronounced loss of speed than output.

The divergence between current activity and business confidence also stood out. Despite weaker factory indicators, manufacturers assessed broader conditions more favorably and continued to expect growth over the next six months. That leaves a picture of softer near-term momentum without the pessimism usually associated with a broad manufacturing retreat.

New orders retreat from September’s rapid pace

The Dallas Fed’s October manufacturing survey showed the new orders index falling 21.4 points, the largest decline among the main current activity gauges highlighted in the release. The indicator nevertheless recorded a 10th consecutive month in positive territory, so the smaller reading does not mean Texas factories collectively reported falling demand.

The responses help illustrate that distinction. About 23% of participating manufacturers reported increased new orders, roughly 14% reported a decrease and nearly 64% saw no change. The positive index measures the balance of firms experiencing growth against those experiencing declines. It is not a percentage change in the dollar value or physical volume of orders.

Other indicators softened in the same direction. The shipments index dropped to 8.4 from 24.8, and capacity utilization fell to 13.7 from 23.9. Both stayed above zero, but their declines show that the easing was visible in goods leaving factories and the use of production capacity, not solely in incoming business.

Unfilled orders offered another sign of moderation. That index fell to 10.1 from 22.7, suggesting the backlog of work was still increasing at more firms than it was decreasing, but with a substantially narrower margin. Finished-goods inventories remained in negative territory at minus 10.9, compared with minus 9.5 in September, indicating more respondents reported shrinking inventories than rising ones.

These are measures of the direction and breadth of change, not estimates of total Texas manufacturing production. The survey was conducted October 13 through October 21, with 64 of 114 manufacturers responding. It offers an early read on factory conditions, but the results should not be treated as a precise measurement of statewide output or a prediction that orders will turn negative next month.

Material costs rise even as hiring growth eases

Cost pressures did not ease alongside factory activity. The index for prices paid for raw materials rose to 55.3 from 52.2, well above its series average of 28.1. The index for prices received for finished goods also increased, reaching 29.9 from 27.6. Together, those measures show that price increases remained widespread among the businesses responding to the survey.

The two price indexes do not, by themselves, show whether manufacturers protected their profit margins. They measure how broadly prices are rising, rather than the size of those increases or the difference between each factory’s costs and selling prices. One respondent in beverage and tobacco manufacturing described pressure on profitability from more expensive materials and diesel-related supplier costs, illustrating how higher input prices can affect an individual operation.

Employment continued to increase on balance, although the hiring measure slipped to 11.6 from 15.1. Hours worked moved the other way, rising to 10.1 from 5.6, which suggests a somewhat stronger increase in working time at factories already operating. The wages and benefits index fell to 20.8 from 27.4, close to its long-run average, while the capital expenditures index edged up to 11.9 from 8.5.

Manufacturers’ written comments described varied conditions. A machinery producer reported active projects and new opportunities, while a printing-related business said work had slowed. Those accounts provide texture to the index readings, but they are individual responses and cannot establish which industries caused the statewide slowdown.

The Federal Reserve’s October Beige Book, released earlier in the month and based on an earlier reporting period, described a pickup in Texas manufacturing activity over the preceding months. It also reported higher diesel costs and continued concerns about trade policy and geopolitical uncertainty. The October survey’s cooling from September therefore follows a period of stronger activity; the two reports do not cover identical time windows.

Confidence improves despite weaker demand readings

Manufacturers were more positive about their business environment than the softer orders figure might suggest. The general business activity index rose to 13.4 from 9.8, while the company outlook index increased to 16.1 from 8.7. The outlook uncertainty index declined to 7.9 from 11.3, indicating that the balance of firms reporting greater uncertainty narrowed.

Six-month expectations were also considerably stronger than the current readings. The future production index held near September’s level at 39.4, compared with 40.3, and the future new orders index rose to 41.9 from 39.5. Expected employment growth strengthened, with that index climbing to 31.5 from 18.1. The future general business activity gauge increased to 38.1 from 20.8.

Such forward-looking figures reflect respondents’ expectations, not orders already booked or jobs guaranteed to materialize. Their significance in October is the difference between manufacturers’ reports about what had just happened and what they anticipated next. A slower current month has not yet translated into a comparable weakening of their six-month view.

Financing remains a separate concern for some businesses. In supplemental Dallas Fed questions answered by 63 manufacturers, 41.3% reported that the cost of available credit had increased over the preceding 12 months. Among the smaller group of 25 manufacturers asked how they responded to higher credit costs, 44% said they had already reduced or delayed capital spending or expansion plans. Those figures come from a separate question set and do not prove that borrowing costs drove October’s fall in new orders.

The clearest near-term test will be whether the decline in new orders continues or stabilizes while production remains positive. The Dallas Fed’s next Texas Manufacturing Outlook Survey is scheduled for November 30.