Manufacturing activity in Texas declined in June for the second consecutive month even as prices and wages continued to rise sharply, raising the prospect that the economy is headed for stagflation.
The Federal Reserve Bank of Dallas said its index for general business activity fell sharply to minus 17.7 from minus 7.3 the previous month, the lowest level since May 2020. Readings below zero indicate a decline in activity.
The production index, a key measure of state manufacturing conditions, barely held on to positive territory, plunging to 2.3 from 18.8 in May, suggesting output stagnated.
The index that measures how companies feel their own business is faring dropped to negative 20.2 from negative 10 a month earlier.
This slump in business conditions and factory output did not provide much relief from inflationary pressures, as prices and wages continued to increase strongly. The raw materials prices index inched down to 57.5, a reading still more than twice its average of 28.0. The finished goods prices index also dropped from 41.8 to 33.8, a level the Dallas Fed described as “highly elevated.” The wages and benefits index came in at 49.9, unchanged from May and markedly higher than its 20.4 average.
Demand weakened in June compared with the previous month, indicating that rising prices and interest rates may be weighing on customer decisions. The new orders index turned negative, falling to minus 7.3 from 3.2 in May, its first negative reading in two years. The growth rate of orders index fell deeper into negative territory, declining to minus 16.2 from minus 5.3. The unfilled orders index fell to minus 8.8 from 4.1, reflecting a decline in backlogged orders and suggesting a further slowdown in output lies ahead.
The shipments index dropped to 1.2 from 13.1, indicating that shipments have nearly stopped growing.
The employment index decreased to 15.2 from 20.9, indicating that payrolls have continued to expand but at a slower pace.
The delivery times index, a key barometer of supply chains, increased to 19.9 from 4.3. That means delivery times lengthened.
The short-term outlook for Texas’ manufacturers turned much grimmer. The future general business activity index plunged to minus 26.0 from minus 6.5 the previous month. The index that measures the outlook of companies for their own business also continued to fall deeper into negative territory, dropping to minus 23.5 from minus 4.5.