Drop In Oil Prices 'Going To Make Things Ugly... Quickly': Dallas Fed Data Out

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Includes: OIL, USO
by: Josh Young

Summary

Dallas Fed Data Shows Drop In Key Forward Indicators.

Production Is Up.

But New Orders and General Business Activity Slowed Dramatically.

The Dallas Fed released its December Texas Manufacturing Outlook Survey on December 29. The headline was optimistic, saying that "Texas Manufacturing Picks Up Pace" but the optimistic data is backward looking, and the forward looking indicators in the report showed a rapid, negative change.

Specifically, two forward looking data points were dramatically worse than the November data. New orders were down from 5.6 to 1.3. And General Business Activity was down from 10.5 to 4.1. These are huge movements and do not bode well for the near term future of the Texas economy.

The Fed used positive wording to describe the changes in the report from November, focusing on trailing indicators such as actual production data for the month. However, new orders and general business activity are better indicators for what that production data and what purchasing data might look like in future months.

I discussed the negative wealth effect for the Texas economy from the drop in oil prices in this article. And I explained JP Morgan's view on Texas's economy in this article. Both highlight risks that the Dallas fed has glossed over in its commentary, but that will surface in early 2015 if the price of oil (NYSEARCA:OIL) stays low.

Another article discussing the Fed numbers quoted "business executives in metal product manufacturing" saying "that the drop in crude oil prices was "going to make things ugly ... quickly."" This is consistent what the prior Seeking Alpha article I wrote said and what JP Morgan's Chief US Economist seems to be saying.

Below is a chart of the price of the oil ETF (NYSEARCA:USO) which tracks the front month price of oil. It is down almost 50% in the past year, which is indicative of a large revenue source for the economy of Texas dropping off. Follow on effects could be material for Texas's economy, and for certain businesses that are disproportionately levered to that economy.

USO Chart

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