The Dallas Fed shows that manufacturing chugs happily along

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Why this might be 2014's most pivotal week for financial releases (Part 4 of 7)

(Continued from Part 3)

The Dallas Fed

The Texas Manufacturing Outlook Survey (or TMOS) results for April will be released by the Dallas Fed on Monday, April 28. The survey has two headline indices: the Business Activity Index, which tells us whether business activity is up or down, and the Production Index, which measures increases or decreases in output.


What is the Texas Manufacturing Outlook Survey (or TMOS)?

The Texas Manufacturing Outlook Survey (or TMOS) is a monthly survey conducted by the Dallas Fed to assess the state’s manufacturing activity. The survey questions respondents on whether output, employment, orders, prices, and other indicators increased, decreased, or remained unchanged over the previous month. The results are then used to calculate an index for each indicator.

Each index is calculated by subtracting the percentage of respondents reporting a decrease from the percentage reporting an increase. When the share of firms reporting an increase exceeds the share reporting a decrease, the index will be greater than zero, suggesting the indicator has increased over the prior month. If the share of firms reporting a decrease exceeds the share reporting an increase, the index will be below zero, suggesting the indicator has decreased over the prior month. An index will be zero when the number of firms reporting an increase is equal to the number of firms reporting a decrease.

Highlights of the March release

  • The Business Activity Index rose strongly from 0.3 in February, to 4.9 in March—a six-month high.
  • The Production Index also increased, from 10.8 in February to 17.1 in March, with output gains showing strength on the back of rising new orders and shipments.
  • The Employment Index rose to a 21-month high of 15, with more firms reporting net hiring, although average work weeks increased at a decreasing pace.
  • Businesses were also optimistic about future economic conditions.

Outlook for April

Business activity in Texas has been relatively unaffected by the poor weather compared to other states. This trend should continue in the April report, as manufacturing growth is on an uptrend in other areas of the economy. Also, the state is home to some of the largest energy majors in the world, like Exxon Mobil (XOM) and oilfield services companies like Schlumberger (SLB). Both Exxon Mobil (XOM) and Schlumberger (SLB) are part of the S&P 500 Index (IVV).

Energy companies are in defensive industries and tend to perform better in times of economic contraction. The demand for heating oil and gas this winter has helped their earnings, although companies like Chevron (CVX) have complained of the difficulty of extraction in the colder weather this winter, which will have an impact on their results. Investors can gain exposure to energy companies by investing in ETFs like the State Street Energy Select ETF (XLE). The top holdings in XLE include Exxon Mobil (XOM), Chevron Corp. (CVX), and Schlumberger (SLB). Exxon Mobil (XOM) and Chevron Corp. (CVX) will declare their Q1 2014 earnings this week.

Continue to Part 5

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