Macro Monday 31 ~ Dallas Fed Manufacturing Index (Key Levels)Macro Monday 31
U.S. Dallas Fed Manufacturing Index
This Index is compiled from a monthly survey conducted by the Federal Reserve Bank of Dallas to assess the health of manufacturing activity in the state of Texas. It provides insight into factors such as production, employment, orders, and prices, offering a snapshot of economic conditions in the region.
Why is the Dallas Fed Manufacturing Index Important?
▫️ As stated above the index covers manufacturing activity in the state of Texas, the state of Texas ranks 2nd only to California in factory production & comes in at 1st as an exporter of manufactured goods, thus Texas is an important state for gauging manufacturing & production in the U.S. economy.
▫️ Texas also contributes an incredible c.10% towards the U.S. Manufacturing gross domestic product making the index an important metric to consider towards potential GDP trends in the U.S.
▫️ The Dallas Fed Manufacturing Index (DFMI) is one of several regional manufacturing surveys that feed into the national Purchasing Managers Index (PMI). The PMI is released later this week on Thursday 1st Feb thus the DFMI on Monday will give us an early indication of the potential direction of the PMI later in the week. FYI, I will be covering the PMI for you on Thursday so stay tuned for that.
How to read the index?
A reading above 0 indicates an expansion of the factory activity compared to the previous month; below 0 represents a contraction; while 0 indicates no change.
The Chart
The chart only dates back to 2005 so we have a limited dataset however we can still see definitive levels of importance and trends over this shorter historic backdrop.
A few findings from the chart:
The + 36.8 Level
Since December 2005 any time we have hit the +36.8 level on the chart it has typically represented a peak in manufacturing and production signaling that a decline would likely follow. This has occurred 3 times and each time within 20 – 23 months of this +36.8 peak we had a recession or a financial crisis.
1) December 2005
21 Months later we had the Great Financial Crisis.
2) June 2018
20 months later we had the COVID-19 Crash.
3) April 2021
23 months later the U.S Banking Crisis occurred in March 2023 resulting in 3 small to mid size banks failing.
- The remaining banks being saved by the Bank Term Funding Program (BTFP) which appears to have successfully contained the contagion for now. The BTFP is ceasing in March 2024 👀
▫️ We can see above that in the event we reach the +36.8 level in the future, history informs us that within 20 – 23 months major economic issues will likely present. If we had known this back in April 2022. After April 2022 the S&P500 fell 15% to its recent lows.
▫️ The National Bureau of Economic Research (NBER) could declare the current period we are in as a soft recession. For the last six recessions, on average, the announcement of when a recession started was declared 8 months after the fact meaning we will would only get confirmation of a recession once we are 6 - 8 months into it. Its worth noting that some recessions were confirmed by the NBER after the recession was over.
- 36.8 Level
A reading below the -36.8 level has historically confirmed a recession. We have not hit this level since the COVID-19 Crash with May 2020 being the last time we have been at this level.
Periods in Contractionary Territory
There have been 2 previous periods where we have remained in contractionary territory for greater than 6 months. These are worth reviewing as we have been in contractionary territory for the 20 months now (April 2022 - Present).
1) Sept 2007 – Nov 2009:
We fell into contractionary territory during the Great Financial Crisis for 26 months. From 2009 to 2016 the index seemed week oscillating around the 0 level and not really breaking out into persistent expansionary territory until 2017 forward.
2) Jan 2015 – Oct 2016:
We fell into contractionary territory for 21 months however there was no recession.
3) Apr 2022 – Present:
We are currently on month 20 of contraction. Now this could be just like point 2 above whereby we recover to expansionary territory in month 21 or 22 (Jan - Feb 2024) however if we do not, we are moving towards a timeline similar to point 1 which was the 26 month Great Financial Crisis. Q1 of 2024 will be very revealing in terms of what we can expect next. In the event we end up in contraction for 26 months or if we hit the -36.8 level we can presume, based on history, that we likely have a recession on our hands. And, if we recover into expansionary territory maybe we have got away with it this time 🙂
You can clearly see that the Dallas Fed Manufacturing Index is significant for assessing the U.S. economy because it provides timely insights into the health of one of the nation's key economic sectors: manufacturing & production. Since Texas is a major hub for manufacturing activity, trends observed in the Dallas Fed index can offer valuable indications of broader economic trends. It is one of several regional indices that contributes to a comprehensive understanding of the manufacturing landscape, aiding policymakers, investors such as ourselves, and businesses in making informed decisions about the state of the economy.
The current economic environment just gets more and more interesting every week
Thanks for coming along again folks 🫡
PUKA
