Manufacturing Regains Footing After Epic Decline, Collapse In Oil And Gas Activity, Employment Deepens

The production index, a key measure of state manufacturing conditions, climbed from -28.0 to 13.6, indicating moderate expansion in output following three months of record or near-record declines.

Other measures of manufacturing activity also pointed to a rebound in growth this month. The new orders index advanced 34 points to 2.9, its first positive reading in four months, with nearly a third of manufacturers noting an increase in orders.

The growth rate of orders index pushed up 25 points but remained negative at -5.8. The capacity utilization and shipments indexes also returned to positive territory.

Perceptions of broader business conditions were mixed in June. The general business activity index surged 43 points but stayed negative at -6.1.

The company outlook index climbed back into positive territory, from -34.6 to 2.7, with 29 percent of manufacturers noting improved outlooks, up from 12 percent last month.

The index measuring uncertainty regarding companies’ outlooks retreated notably again to 9.1—its lowest reading since January. The positive reading still indicates increased uncertainty.

Labor market measures indicated virtually flat employment levels and shorter workweeks this month. The employment index remained negative but rose 10 points to -1.5.

Fifteen percent of firms noted net hiring, while 17 percent noted net layoffs. The hours worked index rose from -22.8 to -4.3, with the still-negative reading signaling reduced workweek length.

Prices and wages showed mixed movements in June. The raw materials prices index moved up 10 points to 12.3. The finished goods prices index, however, remained negative for the sixth straight month as it moved up from -19.4 to -4.7. The wages and benefits index returned to positive territory after two negative readings, coming in at 6.8.

Expectations regarding future business conditions were universally positive in June. The future company outlook and future general business activity indexes returned to positive territory at 16.2 and 19.7, respectively. Other indexes of future manufacturing activity pushed further positive.

Collapse in Oil and Gas Activity, Employment Deepens

Michael Plante

What’s New This Quarter

Activity in the oil and gas sector deteriorated further in the second quarter of 2020, according to oil and gas executives responding to the Dallas Fed Energy Survey.

The business activity index—the survey’s broadest measure of conditions facing Eleventh District energy firms—fell from -50.9 in the first quarter to -66.1 in the second quarter.

It was the lowest reading in the survey’s four-year history and indicative of significant contraction in activity.

The business activity index for oilfield services firms plunged from -46.3 to -73.5, while the business activity index for exploration and production (E&P) firms fell from -53.3 to -62.6.

Production indexes suggest oil and gas production sank relative to the previous quarter. According to E&P executives, the oil production index declined sharply, falling 36 points to -62.6.

The natural gas production index also fell significantly, from -21.2 to -47.8. The oil production index is at its lowest point in the survey’s four-year history.

The index for capital expenditures for E&P firms declined from -49.0 in the first quarter to -66.1 in the second, indicating a further reduction in capital spending. Additionally, the index for capital expenditures for oilfield services firms declined from -50.0 to -73.5.

Most indexes point to worsening conditions among oilfield services firms. The equipment utilization index fell from -47.2 in the first quarter to -69.2 in the second, a survey low.

The operating margins index dropped from -50.0 to -68.6. While firms found relief as input costs collapsed—that index fell from -11.3 to -50.0—the index of prices received for services also slid further into negative territory, from -37.7 to -64.7.

The aggregate employment index posted a fifth consecutive negative reading, declining from -24.0 to -46.1, which suggests an acceleration in job cuts. Additionally, the aggregate employee hours worked index dropped from -32.1 to -47.0. The index for aggregate wages and benefits fell further into negative territory, from -8.2 to -41.7.

The company outlook index reading improved but remained deeply negative at -51.0 in the second quarter, indicating outlooks deteriorated.

While uncertainty remained elevated, slightly fewer firms noted rising uncertainty this quarter than last, and the aggregate index fell 28 points to 35.7.

On average, respondents expect a West Texas Intermediate (WTI) oil price of $42.11 per barrel by year-end 2020, with responses ranging from $22 to $65 per barrel.

Survey participants expect Henry Hub natural gas prices to be $2.15 per million British thermal units (MMBtu) by year-end.

For reference, WTI spot prices averaged $37.75 per barrel during the survey collection period, and Henry Hub spot prices averaged $1.61 per MMBtu.

Source: The Federal Reserve Bank of Dallas