Dallas Fed Manufacturing Index Signals a Strengthening Industrial Sector
The Texas Manufacturing Outlook Survey is a monthly survey of Texas-area manufacturers. Firms report on how business conditions have changed for a number of indicators, including production, new orders, employment, prices and company outlook. The Survey is primarily a regional survey, but its key indexes are highly correlated with state-level measures of business activity and employment.
According to the Dallas Fed Manufacturing Index, general business activity in February increased to 17.8 from 15.3 in January. This is better than the expected estimate of 15.8. This is essentially bullish for the manufacturing sector and positive for general economic growth in the United States.
According to the report, the production index, a key measure of state manufacturing conditions, rose from 5.8 to 11.2, suggesting a pickup in the pace of growth.
Other measures of current manufacturing conditions also indicated expansion in February. The new orders index was positive for a second month in a row but fell from 9.5 to 5.8. Similarly, the shipments index moved down from 6.1 to 4.2. Capacity utilization increased further in February; the index edged up from 8.5 to 10.
Perceptions of broader economic conditions were more positive in February. The general business activity index rose to 17.8, its highest reading since November 2010. More than a quarter of manufacturers noted improvement in the level of business activity, while 8 percent noted a worsening. The company outlook index also reached a level not seen since 2010; it advanced from 13.5 to 15.8.
Traders who believe that a better-than-expected reading in the Dallas Manufacturing Index is positive for the US economy, you might want to consider the following trades:
- Long general industrial companies (NYSE: XLI) like Illinois Tool Works (NYSE: ITW) or Caterpillar (NYSE: CAT) as these companies will benefit for increasing industrial production.
- Also, long Consumer Discretionary companies like Target (NYSE: TGT) or the Consumer Discretionary ETF (NYSE: XLY)
Traders who do not believe that the manufacturing survey is a leading indicator for the general US economy, you may consider alternative positions:
- Long Consumer Staple companies like Procter & Gamble (NYSE: PG) and Colgate (NYSE: CL) because even if less people remain in the workforce, they still need to buy staple products like shampoo and toothpaste.
- Also, short big-ticket appliance makers like Whirlpool (NYSE: WHR) if the manufacturing trend is worse-than-expected.
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