What the Texas Manufacturing Survey Tells Us About Commodities

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The Texas Manufacturing Survey saw a drop in the overall index from 10.8 to 1.1 in August. Much like the ISM’s Manufacturing Index, a reading above zero indicates positive growth/increase, while below zero readings indicate contraction/decrease. Source: Federal Reserve Bank of Dallas.

Some interesting manufacturing trends are apparent in the latest Texas manufacturing survey released yesterday by the Dallas Fed. Overall, the findings showed the “still-growing-but-stagnant trend that has been seen at the national level, punctuated by an overall index value near zero this August (see above) for the first time in nearly six months.

While most of the other results are hardly worthy of “red alert status most of it confirms what we’ve been saying about the economy some line items are particularly telling.

Mainly, raw materials price increases are showing no sign of slowing down.

The survey showed that the raw materials price index declined from 34.3 to 23.2, the lowest reading since September 2010. This index saw the third largest decrease of all the indicators, dropping 11.1 points (new orders and unfilled orders dropped 11.2 and 16.8 points, respectively). This means 38 percent of respondents anticipate further increases in raw materials prices over the next six months.

Turns out they might be right: according to the survey’s historical data, this trend has been going in the same direction for 25 consecutive months longer than any of their 15 current business indicators. 32.8 percent of respondents reported raw material price increases in August, 57.6 reported no change, but only 9.6 percent said their prices went down.

One primary metal manufacturer said “there has been a significant decrease in new orders over the past three to four weeks. Other respondents in the fabricated sector said that while their best months for business are generally between April and September, they’ve seen a decline in orders early in the summer that continued into August. They’ve also had to let employees go rather than create more jobs.

If anything, this proves that we’re no longer in a period of stable commodity prices (if we ever were); rather, manufacturing sectors, from primary to fabricated metal products, must accept volatility and inflation as the new norms. Although the economy is said to likely continue its general upward trend, buyers should make sure their contracts are sound as we head into 2012 who knows what unexpected price increases are around the corner.

–Taras Berezowsky

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