The Dallas Fed manufacturing index dropped to -8.3 in February, compared to 14.1 the previous month. This marks the lowest level since September 2024, when it stood at -9.0.

The output index decreased to -9.1 from 12.2 in January, while the new orders index plummeted by 11 points to -3.5. Capacity utilization fell 14 points to -8.7, though the shipments index remained positive at 5.6.

Business conditions have worsened as the general business activity index fell by 22 points to -8.3. The company outlook index decreased by 24 points to -5.2, and the outlook uncertainty index reached 29.2, the highest in seven months.

The labor market shows signs of weakness with the employment index near zero, indicating equal hiring and layoffs. The hours worked index dropped to -14.2, the lowest since mid-2020.

Cost pressures are evident; the raw materials prices index increased to 35.0, a multiyear high, while finished goods prices inched up to 7.8. The wages and benefits index eased slightly from 20.9 to 16.7.

Looking ahead, the future production index fell to 28.3 from 44.8, and the future general business activity index decreased to 7.7 from 35.5. Other future manufacturing activity metrics showed positive but declining figures.

US stock indices faced challenges, with the S&P down 0.38%, the NASDAQ down 1.0%, and the Dow marginally up by 0.02%. The small-cap Russell 2000 declined by 0.86%.

Yields on government bonds have also decreased, with the two-year yield at 4.191% and the ten-year yield at 4.409%.

A steep decline in Texas factory activity suggests that industrial output is losing steam. A drop from 14.1 to -8.3 in just a month is not a minor shift; it signals broader weakness in economic momentum. Production is falling, new orders are shrinking, and capacity usage is sliding—indications that manufacturing firms are facing mounting challenges.

Demand deterioration is evident. A double-digit decline in new orders means companies are securing fewer contracts, a sign consumers and businesses are pulling back. Shipments remain in positive territory, which suggests some companies are still delivering past commitments. But shrinking backlogs may mean those deliveries could slow in the near-term.

Business sentiment has worsened. A 22-point decline in general business activity is far from normal month-over-month fluctuation. Lowered expectations, reflected in the company outlook index, reinforce the idea that firms see tougher conditions ahead. Confidence is taking hits, and rising uncertainty—now at its highest in months—shows decision-makers are struggling with unpredictability.

Labour market cracks are appearing. Firms are neither expanding nor shrinking payrolls overall, yet a decline in hours worked to levels not seen since 2020 is concerning. When companies cut hours instead of jobs, it often means demand is not strong enough to justify more shifts. It also tends to precede larger employment adjustments if weak conditions persist.

Costs are a growing concern. Input prices jumped, suggesting businesses are paying more for materials. While final goods prices rose at a slower rate, persistent cost pressure will test how much firms can absorb and how much they pass to consumers. Wages have decelerated slightly, but they remain elevated, maintaining operational cost burdens.

Forward-looking indicators are worsening. Future production expectations have weakened, falling sharply in a month. Optimism about broader business activity dropped even more, meaning companies see conditions deteriorating rather than improving. Though still in positive territory, every major future indicator is slipping, a sign that momentum could continue declining.

Markets have reacted. Stocks struggled, weighed down by tech-heavy names, while the Dow held steady with near-flat movement. Small caps pulled back more sharply, which often happens when growth expectations weaken.

Bond yields declined. The two-year dipped, suggesting shifting rate expectations, while the ten-year remains elevated, indicating cautious longer-term sentiment. Investors appear to be adjusting their positioning, albeit without sharp dislocations.

All of this points to expectations adjusting to weaker business conditions. Manufacturing is showing clear loss of strength, and markets are reflecting those shifts—pricing in lower growth, adjusting risk, and reassessing the path ahead.