Texas service sector revenues improve but outlook stays negative

Ahead of the FOMC’s decision tomorrow, the Dallas Fed published its service sector outlook survey, for January 2023.

Today, inflation in services is considered to be a key driver behind rising prices, and a priority for the Federal Reserve.

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With Texas being the second largest state economy in the United States, its services trend provides a snapshot of what may be expected throughout the broader economy.

Texas services survey

The services revenue index rose from its negative territory at -0.6 in December to 4.9 in the month of January, suggesting an improvement in business activity.

This outperformed a forecast of 0 published by TradingEconomics.com.

Employment in the sector was surprisingly strong, with the January index rising to 10.5, 5.2 points above December, and settling well above the series average of 6.6.

This marked the 30^th consecutive positive reading in the employment subindex.

Part-time employment turned positive as well, rising 2.6 points from -1.4 to 1.2

In a recent labour market commentary available here, I discussed the growth of part-time jobs in the US.

The hours worked index also ticked up higher to 0.9, from -1.8 last month.

Worker wages and benefits notched 1.8 points higher, rising to 21.7 in January, staying above the series average of 15.7.

The quarterly Employment Cost Index (ECI) released earlier today showed a decline in labour costs, which may have already peaked in the broader market. Interested readers can learn about the latest ECI figures in this article.

Price pressures moderated to a degree on both the input and sales sides, slipping 4.6 points and 0.7 points, respectively.

Current conditions

Company outlooks and general business conditions remained well in negative territory, although levels of pessimism waned.

The former improved to -8.3 from -11.0 in the previous month, whereas the latter shifted higher to -15.0 from -20.5.

The improvement in the general business activity fell short of the market forecast of -12.0 published by TradingEconomics.com.

With series averages of 5.0 and 3.4, respectively, the prevailing business sentiment remains weak.

Outlook uncertainty moderated somewhat from 22.0 to 20.0, compared to the series average of 13.4.

Future expectations

Looking six months ahead, both the company outlook subindex and general business activity improved since the December release.

Company outlooks shifted into positive territory reaching 6.3 as compared to -1.7 in the month prior.

The improvement in forward-looking survey responses indicates that respondents may be optimistic about growth prospects towards the middle of the year.

Retail survey

The retail survey which is published separately but is part of the services survey indicated continued weakness in the sector but showed an improvement by 9 points to -3.0 in January.

Labour market indicators in the retail sector also headed higher across all categories, but unlike the broader services index, some segments remained in negative territory.

Part-time employment and the hours worked subindex improved by 4.1 and 5.0 points to -1.1 and -6.1, respectively, reflecting compressed work weeks.

The decline in hours worked was considerably deeper than the series average of -1.8.

Surprisingly, overall employment in retail did rise 2.7 points to +2.0, above the series average of 1.9.     

Inventories rose but at a declining pace, falling to 3.2 in January from 14.2 in December.

Input price pressures fell 2.0 points to 33.3, reflecting lower producer prices and limited stocking.

Selling prices, on the other hand, ended higher by 7 points to 23.4.

Retail expectations

The outlook for general business activity improved from -30 to -17, well removed from the series average of 11.7.

Expectations of retail sales (-5.3 point change), hours worked (-2.7 point change), wages and benefits (-5.1 point change) and selling prices (-3.9 points change), all declined.

The survey of input prices found expectations plummeting by 14.7 points, to 23.4 as against the series average of 34.4. This suggests that disinflationary forces may be becoming more visible to respondents in the retail sector.

Respondents expect employment levels and capital expenditures to improve later this year by 9.9 points and 5.8 points, respectively.