Texas Manufacturing and Energy Firms Business Activity Plunges in April
Economic Report Monitor #22
April 27th, 2020
The last month of April opens with just one economic report from the Dallas Federal Reserve. Another April manufacturing survey relays the economic slowdown once again with general business activity down to -73.7 on large drops in production (-20.0 to -55.3), capacity utilization (-21.1 to -54.5), new orders (-25.7 to -67.0), and shipments (-22.8 to -56.6). Most inventories were flat with 52.2% reporting no change. Prices paid and received were also lower but more stable than anything; in both categories, more than 65% of respondents reported no change. Current capital expenditures dropped significantly, down -20.0 to -54.3. This is far different from the forward look at capital expenditures which actually increased 0.1 to -19.7. Similarly, views of other categories saw mixed changes with growth in new orders, shipments, and employment. These results continue the trend of outlook responses being much more optimistic than current responses.
Of course, one can't discuss the outlook of Texas firms without special mention of the energy industry. The Dallas Fed Energy Survey, while quarterly, provides a look into energy companies' forecasts and expected operating profitability in the near future. The survey was conducted March 11th-19th at the beginning of the crash in WTI oil futures, and that bearishness was represented in responses. Year-end 2020 forecasts for the price of oil fell over $18 to $40.50 in 2020 Q1 with 7 responses coming in below $30 (the price of oil was $28.27 during the survey). Natural gas forecasts were equally bearish as the average fell $0.48 to $2.03 with 5 responses below $1.50.
With the price of energy commodities driving business decisions in the industry, the bearishness also permeated into business indicator responses. Current company outlook tanked -76.9 to -75.0 with level of business activity down to -50.9 from -4.2 and capital expenditures down to -49.4 from -1.8. The worsening in current conditions has more than half of respondents expecting to have to cut employment. Unfortunately for most firms, there is nothing they can do. A survey of breakeven prices by drilling region reveals that at current prices (June contract traded at $12.93 as of 4/27/2020) most drillers in every region cannot even cover operating costs at existing wells much less being able to afford to drill new ones.
Compared to the nonenergy manufacturing, the energy sector, including both drillers and service providers, is in for a longer economic shock. The compounded impact of both demand and supply shifts due to the COVID-19 outbreak and supply growth will definitely last beyond the lockdown state. This also means there should be less of a motive to save energy firms since subsidizing oil and gas losses will only prolong higher than sustainable production leading to a larger supply glut for longer. There will be structural shifts in the sector as the crisis continues, and there is a very good chance it may never recover to its previous state.
April 27th, 2020
The last month of April opens with just one economic report from the Dallas Federal Reserve. Another April manufacturing survey relays the economic slowdown once again with general business activity down to -73.7 on large drops in production (-20.0 to -55.3), capacity utilization (-21.1 to -54.5), new orders (-25.7 to -67.0), and shipments (-22.8 to -56.6). Most inventories were flat with 52.2% reporting no change. Prices paid and received were also lower but more stable than anything; in both categories, more than 65% of respondents reported no change. Current capital expenditures dropped significantly, down -20.0 to -54.3. This is far different from the forward look at capital expenditures which actually increased 0.1 to -19.7. Similarly, views of other categories saw mixed changes with growth in new orders, shipments, and employment. These results continue the trend of outlook responses being much more optimistic than current responses.
Of course, one can't discuss the outlook of Texas firms without special mention of the energy industry. The Dallas Fed Energy Survey, while quarterly, provides a look into energy companies' forecasts and expected operating profitability in the near future. The survey was conducted March 11th-19th at the beginning of the crash in WTI oil futures, and that bearishness was represented in responses. Year-end 2020 forecasts for the price of oil fell over $18 to $40.50 in 2020 Q1 with 7 responses coming in below $30 (the price of oil was $28.27 during the survey). Natural gas forecasts were equally bearish as the average fell $0.48 to $2.03 with 5 responses below $1.50.
With the price of energy commodities driving business decisions in the industry, the bearishness also permeated into business indicator responses. Current company outlook tanked -76.9 to -75.0 with level of business activity down to -50.9 from -4.2 and capital expenditures down to -49.4 from -1.8. The worsening in current conditions has more than half of respondents expecting to have to cut employment. Unfortunately for most firms, there is nothing they can do. A survey of breakeven prices by drilling region reveals that at current prices (June contract traded at $12.93 as of 4/27/2020) most drillers in every region cannot even cover operating costs at existing wells much less being able to afford to drill new ones.
Compared to the nonenergy manufacturing, the energy sector, including both drillers and service providers, is in for a longer economic shock. The compounded impact of both demand and supply shifts due to the COVID-19 outbreak and supply growth will definitely last beyond the lockdown state. This also means there should be less of a motive to save energy firms since subsidizing oil and gas losses will only prolong higher than sustainable production leading to a larger supply glut for longer. There will be structural shifts in the sector as the crisis continues, and there is a very good chance it may never recover to its previous state.
Comments
Post a Comment