Market Overview

Dallas Fed Manufacturing Index Surprises to the Downside

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 April decreased to -3.4 from 10.8 in March. This is also worse than the expected estimate of 8.0. This is essentially bearish for the manufacturing sector and negative for general economic growth in the United States.

According to the report, the production index, a key measure of state manufacturing conditions, fell from 11.1 to 5.6, suggesting growth continued but at a slower pace than last month.

Most other measures of current manufacturing conditions stagnated in April. The capacity utilization index came in at 1.4, down markedly from 12.3 in March, with one-quarter of respondents noting decreases. Shipment volumes were flat in April after increasing for the previous three months; the shipments index fell from 8.6 to -0.8. The new orders index posted a near-zero reading for the second consecutive month.

Expectations regarding future business conditions were less optimistic in April. The index of future general business activity edged down from 19.1 to 15.7. The index of future company outlook came in at 14.4, down significantly from 26.2 in March. Other indexes for future manufacturing activity also decreased, although all remained in strong positive territory.


ACTION ITEMS:

Bullish:
Traders who believe that the Dallas Manufacturing Index is a leading indicator for the US economy, you might want to consider the following trades:
  • If the reading is better than expected, long general industrial companies 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)
Bearish:
Traders who believe that the Dallas Manufacturing Index is not a leading indicator for the US economy, you may consider alternative positions:
  • If the number comes in worse than expected, long Consumer Staple companies like Procter & Gamble (NYSE: PG) and Colgate (NYSE: CL) because even if the economy is struggling, people 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.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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