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Dallas Fed Manufacturing Index Surprises to the Downside

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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 May decreased to -5.1 from -3.4 in April. This is also worse than the expected estimate of 3.0. 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, held steady at 11.1, suggesting growth continued at about the same pace as last month.

Most other measures of current manufacturing conditions also indicated continued expansion in March, although new orders stagnated. The shipments index rose from 4.2 to 8.6, with more than a quarter of manufacturers noting an increase in shipment volumes. Capacity utilization increased further in March; the index edged up from 10 to 12.3. The new orders index meanwhile fell from 5.8 in February to zero this month, suggesting demand stalled.

Expectations regarding future business conditions were more optimistic in March. The index of future general business activity has been positive for six months and rose from 15.9 to 19.1 this month. The index of future company outlook came in at 26.2, up slightly from 24.2 in February. Other indexes for future manufacturing activity also increased.


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.
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