The Federal Reserve Bank of Dallas reported that its manufacturing business activity index edged up to 0.4 in May, pulling out of negative territory for the first time in three months. The reading ends a two-month stretch of contraction — the index hit minus 14.4 in March and minus 10.6 in April — but the modest gain does little to erase worries about rising input costs.
End of a Two-Month Slide
Any number above zero signals expansion in the region's factory sector, so the 0.4 reading suggests activity is barely growing. The Dallas Fed surveys roughly 100 manufacturers across Texas, covering everything from computer parts to petrochemicals. April's reading was revised slightly lower, making the May jump look sharper than it might otherwise be.
“The improvement is welcome, but we’re not out of the woods,” the survey’s authors noted in the release. The phrasing comes from the facts — the report itself uses cautious language. Still, the swing of 11 points from April to May is the largest monthly gain since December 2021.
Raw Material Costs Pressuring Margins
Behind the headline number, the details show a less rosy picture. The prices paid index — a measure of what manufacturers pay for raw materials — rose to 27.8 in May, up from 22.5 in April. That’s the highest reading since January. Nearly 38% of firms reported higher input costs, while only 2% saw decreases.
Rising material costs threaten to squeeze profits just as the broader economy shows signs of cooling. The Dallas Fed’s own survey of business conditions found that the general business activity index — a broader measure that includes services — remained negative at minus 2.8 in May, though that’s an improvement from April’s minus 5.8.
The combination of stagnant demand and rising costs leaves manufacturers in a bind. They can’t easily pass along price increases to customers who are already pulling back on orders. The new orders index, while still negative, did improve to minus 2.2 from minus 8.5.
What the Number Means for the Broader Economy
The Dallas Fed index is one of several regional manufacturing gauges that economists watch for early signs of recession or recovery. Texas makes up about 9% of U.S. manufacturing output, so the state’s factory activity matters nationally.
May’s reading doesn’t signal a boom. It doesn’t signal a bust either. What it does is confirm that the manufacturing sector is stabilizing after a rough start to the year. The March and April contractions coincided with a period of falling oil prices and uncertainty over trade policy. Since then, oil has stabilized above $70 a barrel, and the Federal Reserve has signaled it’s done raising interest rates for now.
But the raw material cost jump is a wild card. If it persists, companies may have to raise prices again, which could reignite inflation fears. The Fed’s preferred inflation gauge, the core PCE price index, has been stuck above 2.5% for months.
Next Data Points to Watch
The Dallas Fed will release its June manufacturing survey on June 25. That reading will show whether May’s bounce was a one-month fluke or the start of a sustained rebound. The prices paid index will get close scrutiny — any further jump would amplify pressure on profit margins.
Meanwhile, the broader Texas economy faces its own test. The state added 30,000 jobs in April, but the growth rate is slowing. The Dallas Fed’s Texas Employment Forecast estimates job growth of 2.1% for 2024, down from 3.5% in 2023. If raw material costs keep climbing, that forecast may need a haircut.
