Texas manufacturing sector contracts
Decline in activity is state’s first since oil bust 3 years ago
Texas’ manufacturing sector contracted in November for the first time since the end of the last oil bust more than three years ago, according to a survey of Texas business executives by the Federal Reserve Bank of Dallas.
Declining manufacturing activity in Texas reflects a broader industry slowdown across the nation and the world. Manufacturers have been hit particularly hard by the U.S.-China trade war, which has disrupted supply chains, raised costs and stoked uncertainty among business customers, which are holding off on new investment.
At the same time, the slowing energy sector is beginning to trickle through the Texas economy as oil and gas companies cut capital spending plans and lay off workers. Oil and gas companies are big customers for Texas manufacturers, which make a variety of equipment and components for the energy sector.
The Dallas Fed’s production index, which is a key measure of state manufacturing conditions, dipped into negative territory this month for the first time since June
2016, just four months after oil prices bottomed at about $26 a barrel. The index dropped to negative 2.4; positive readings indicate an expansion, negative readings a contraction.
The national manufacturing sector has been contracting since August, according to the Manufacturing ISM survey, a well-regarded gauge of national manufacturing conditions.
Tariffs, man
Manufacturing activity in the state and in Houston has slowed for much of the year, according to the Dallas Fed’s survey. The industry rebounded briefly in the summer, when reports indicated that the trade talks between the U.S. and China might result in a deal. But in late August, China announced it would impose additional retaliatory tariffs against $75 billion worth of U.S. goods, and tensions escalated again.
“There was a little bit of a break where it seemed like some of the uncertainty was being resolved and trade talks were underway,” said Emily Kerr, a senior business economist for the Dallas Fed.
A Dallas Fed survey earlier this year found that tariffs on materials such as steel and aluminum are shrinking orders, raising costs and cutting into profits for manufacturers,
which operate within tight margins. Many small companies, facing fierce competition at home and abroad, have found it difficult to pass the cost of the tariffs on to their customers.
One survey respondent in chemical manufacturing wrote in this month’s report that tariffs continue to be hard to pass on to customers. Another chemical manufacturer wrote that one of their customers permanently shuttered a plant to move production overseas.
A handful of Houstonarea manufacturers have announced cutbacks or closures in recent months amid the rising costs of steel tariffs.
United Structures of America, a Houston metal fabrication and engineering company, closed its Houston plant in September, resulting in 73 layoffs, and blamed the tariffs in addition to other “crippling” business conditions. Cookware manufacturer Tramontina cut 100 jobs from a facility in Sugar Land in September, blaming in part the increased cost of aluminum and steel due to the tariffs.
Tied to energy
The last time the state’s manufacturing sector contracted was in 2016 on the heels of the oil bust, according to the survey. The slowdown in the energy sector in recent months is likely in part to blame for the manufacturing contraction in November, said Kerr.
In Texas, a significant portion of the manufacturing sector is tied to the energy sector; for example, local manufacturers often build equipment for the oil and gas industry, such as pipelines.
The continuing trade war between the United States and China has contributed to an global economic slowdown, which in turn has depressed energy demand and oil prices, which remain stuck in the $50 to $60 a barrel range. That is barely enough for many oil companies to make money, which has led several to cut spending on big-ticket items such as equipment.
Oil settled Monday at $58.01 a barrel in New York.
“(Manufacturing) is more susceptible to energy shocks than the service sector,” Kerr said. “That weakness in the energy sector certainly impacts manufacturing.”
The energy sector’s troubles have caused at least one steel manufacturing company, TimkenSteel Corp., to shutter a Houston plant after nearly 50 years in operation, the company said last week.
The road to 2020
Political uncertainty with the upcoming 2020 presidential election is also weighing on the minds of executives, the survey found. There were several comments about the election
and political uncertainty this month as opposed to previous months.
Executives are worried about tariffs and political gridlock in Washington as legislation important to the industry, such as passage of the new U.S.-Mexico-Canada trade agreement, remains in limbo, said Rey Chavez, president and CEO of the San Antonio Manufacturers Association.
Company leaders are also struggling to find employees with the right skills. While training programs are helping, manufacturers are battling people’s perception of industry.
“People think manufacturing jobs are not sexy, not clean,” he said. “That’s hard to believe because it’s changed so much (with automation).”
Despite the contraction, the surveyed executives said they were optimistic about future business conditions. The majority of respondents said they expect manufacturing activity to recover six months from now because they believe a U.S.-China trade deal will be reached by then and business will rapidly increase.
“We have a fairly strong economy,” Kerr said. “Yes we have trade issues and labor constraints. But they’re not seeing a bunch of red flags going forward.”