Why a production uptick impacts companies like Union Pacific

Market Realist

This week's key manufacturing, construction, and labor releases (Part 6 of 7)

(Continued from Part 5)

The Texas Manufacturing Outlook Survey

The Texas Manufacturing Outlook Survey (or TMOS) results for March will be released by the Dallas Fed on Monday, March 31. The survey’s headline numbers are the Business Activity Index and the Production Index. The former indicates whether economic activity has increased over the month, while the latter measures output increases or decreases.

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 asks respondents whether output, employment, orders, prices, and other indicators increased, decreased, or remained unchanged over the previous month. They 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.

Last month, the General Activity Index recorded its lowest reading since June 2013. However, the production index rose from 7.1 to 10.8, while the new orders index continued to indicate demand growth and was 9.5, down from 14.4 in January but higher than the levels we saw in the latter part of 2013.

Interpreting the Dallas Fed’s TMOS: Benefits for investors

An increase in production and new orders would benefit manufacturing companies, as it would directly translate to top-line growth. ETFs with exposure to the industrial sector include the State Street Industrial Select Sector SPDR (XLI). An increase in production and new orders would also significantly benefit companies in the transportation and logistics businesses due to the trickle-down effect that increased manufacturing activity generates. The top holdings in XLI include Union Pacific Corp. (UNP) and United Parcel Service Inc. (UPS).

An increase in production activity will also imply that economic growth is gaining traction and that the low rate environment might not persist. Bond prices move inversely to interest rates. One way of profiting from rising rates is to invest in inverse bond funds like the ProShares Short 20+ Year Treasury Fund (TBF) and the Barclays iPath US Treasury 10-Year Bear ETN (DTYS). Inverse bond ETFs provide the inverse return of the underlying benchmark index.

To learn about two measures of weekly consumer confidence that will likely impact economic growth, read on to Part 7 of this series.

Continue to Part 7

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