Texas manufacturers are tapping the brakes.
Nearly a quarter of manufacturing executives said they cut production in June, a sharp increase from May and earlier months, according to a new survey by the Federal Reserve Bank of Dallas.
Over 30% said new orders had declined and their company outlook had worsened, and uncertainty shot up.
Some results were the worst since the first months of the pandemic, suggesting some manufacturers were pulling back in the face of a potential recession.
“We have seen a sharp decrease in demand across all sectors,” a maker of textile products told the Dallas Fed. “How the Federal Reserve justifies interest rate increases, when all signs show we are heading for a recession, is beyond my comprehension.”
Many execs cited inflation, supply chain constraints and labor shortages – problems that have plagued businesses for months.
“It looks like a recession is on its way,” said a wood products manufacturer, adding that it doesn’t look good for housing. “We are expecting a major slowdown due to materials cost, labor cost and mortgage rates.”
Two companies in the printing business offered contrasting views: “Inflation fears are worse than the inflation,” said one. “There are slight signs of a slowdown – not conclusive.”
But another said it had been “very slow for incoming orders” for two weeks: “We’re not sure if fuel, inflation or summer vacation is the cause of it.”
The survey was taken June 14-22 and included 90 execs from Texas manufacturing. A similar survey of 284 execs at services companies was conducted over the same period.
While the surveys reveal many negative sentiments, especially about company outlooks and uncertainty, the results indicate that Texas manufacturing growth was slowing, not contracting – an important distinction, said Emily Kerr, senior business economist at the Dallas Fed.
“The manufacturing sector has been pretty hot, and in general, we can’t keep up that hot rate forever,” Kerr said. “I think this is an expected moderation, especially knowing the headwinds at play.”
While the share of manufacturers reporting a decrease in production increased significantly in June, slightly more respondents still had higher output. There just weren’t nearly as many growing producers as in May.
The cut in June production follows a decline in new orders. Over 30% of execs said new orders declined in June compared with 23% reporting an increase in orders.
It’s the first time declines outnumbered increases in new orders since May 2020, when the pandemic was in its early stages. “There are clear signs of early cooling beginning,” said a maker of electronics.
Respondents said many factors contributed to lower demand, including the Federal Reserve raising interest rates, the continuing rise in the cost of materials and finished goods, and limited supplies of certain components.
“At this point, I don’t think there’s a clear picture of what exactly is slowing demand,” Kerr said.
Despite the slowdown, almost a quarter of manufacturers were making hires in June, half were increasing wages and benefits, and over 20% were increasing work hours.
Those are solid numbers, although a decline from recent months. In the same vein, nearly 40% said they were getting higher prices for finished goods and two-thirds were paying higher prices for materials – high numbers, to be sure, but lower than in previous months.
“Supplies of raw materials are becoming slightly easier to get with prices moderating,” one manufacturer said.
The Dallas Fed survey of services firms revealed stronger growth in June with 41% reporting an increase in revenue compared with 22% reporting a decline. The share adding jobs and work hours also remained higher than those cutting back.
But “perceptions of broader business conditions plunged in June, as firms noted a surge in outlook uncertainty,” the Dallas Fed wrote in the report released Tuesday. The outlook index dropped to its worst reading since July 2020, and uncertainty for the services sector was near the record high in April 2020, when COVID first gripped the economy.
“Our business is on the rise, but so is our anxiety,” said an exec from a professional and technical services company.
“This year has been very robust,” said an exec from the same industry. “But the second half of the year may tell a different story.”
“Recession talk is scaring people,” said a building contractor.
Kerr noted that business indicators remained strong for services firms, including revenue, hiring and investment. But near-term sentiment moved in the other direction, reflected in much worse outlooks and higher uncertainty.
“That’s where it gets more gloomy,” Kerr said.
Look out a little farther, to what executives expect in six months, and there’s optimism. More manufacturers project higher output and hiring than those cutting back. An even greater share of services firms expect increases in revenue, jobs and capital spending.
One way to explain the negative sentiments mixed with higher projections: Many companies expect to continue growing, just not at the recent pace, Kerr said.
For example, Texas has historically grown jobs at a rate of 2% annually. The Dallas Fed projects that recent job growth will slow in the second half but still end the year with a gain of 4%.
“We have so much runway between the red hot growth we’ve seen and a contraction,” Kerr said. “We’re growing a lot slower, but it’s still growth.”
