The deep contraction in Texas’ manufacturing sector appears to have hit its bottom in April according to a survey by the Federal Reserve Bank of Dallas that shows losses in manufacturing production slowed in May.
While manufacturing continued to contract in May, the pace of decline slowed compared to April. The production index, a measure of state manufacturing conditions, recovered almost 28 points from -55.6 to -28 this month. Negative readings indicate a contraction, while positive readings indicate an expansion in the sector.
“Upward movement in the index tells us the contraction is moderating,” said Emily Kerr, a senior business economist for the Dallas Fed, in a statement.
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Mandated shutdowns to slow the spread of the coronavirus both closed non-essential factories and destroyed demand for the ones that could remain open. As economies around the world struggled to respond to the outbreak, supply chain disruptions have become common, increasing costs.
As a result, Texas’ manufacturing indicator declined to minus 35.3 in March before hitting its historic low in April. The contraction last month was far worse than the lows of the Great Recession of 2007 to 2009, when the lowest index reading recorded was minus 37.7.
A survey of both manufacturing and service sector executives reported that the oil price bust is having an additional impact on their business outside of the coronavirus – nearly half of firms surveyed said revenues have been negatively impacted by reduced activity in the energy industry.
While the sector is still clearly in a deep contraction, Kerr said that an indicator for future manufacturing activity is a “bright spot” in the survey this month. That indicator rebounded to positive territory, meaning survey respondents believe manufacturing activity will recover soon.