Texas factory output jumps to 29.5, but costs rose 4.9% in a year while selling prices rose 3%

Texas manufacturers stepped up output sharply in September, the Federal Reserve Bank of Dallas said on Monday. The Texas Manufacturing Outlook Survey's production index jumped 13.4 points to 29.5, and new orders rose to 30.7 from 22.0. The same survey shows costs climbing faster than the prices factories can charge.

Demand is real

Every activity measure improved. Capacity utilization rose to 23.9 from 12.8 and shipments rose to 24.8 from 14.1. The biggest jump came in unfilled orders, which rose 24 points to 22.7 from minus 1.3, meaning more firms reported backlogs growing than shrinking. Finished goods inventories fell to minus 9.5. Taken together, orders are arriving faster than plants can ship them and shelves are being drawn down. The employment index rose to 15.1 from 8.0.

Each index is the share of firms reporting an increase minus the share reporting a decrease. The Dallas Fed said 63 of the 113 manufacturers it surveyed responded between Sept. 15 and 23.

The number behind the headline: costs

The raw materials prices index rose 8.1 points to 52.2. Its average since 2004 is 28.0. Of the firms that answered, 54.9% said they paid more for materials this month and 2.7% said they paid less. The finished goods prices index, which measures what factories charge, rose to 27.6. Wages and benefits rose to 27.4.

A second set of questions, put to 282 Texas manufacturing and service executives, puts percentages on it. On average, firms reported input costs up 4.9% over the past 12 months, up from 4.4% in June and the fastest pace in more than two years. Wages rose 3.9% and selling prices rose 3.0%. Over the next 12 months, firms expect input costs to rise 4.6%, wages 3.9% and selling prices 3.5%. That 3.5% is the highest selling-price expectation since December 2023. Inflation was again the concern respondents cited most often. The share citing interest rates rose.

What a 1.9-point gap does to a margin

Here is an illustrative example. Take a shop with $10 million in sales, $6 million in materials and $2.5 million in payroll, which leaves a $1.5 million, 15% margin. Apply the survey averages: sales up 3.0% (+$300,000), materials up 4.9% (+$294,000) and wages up 3.9% (+$97,500). Revenue rises by $300,000 and costs rise by $391,500. The margin falls to about $1.41 million, or 13.7% of $10.3 million in sales. The business grew and made less money.

Respondents described that squeeze directly. A nonmetallic mineral products maker, the category that covers concrete and aggregates, wrote that diesel "is hurting our gross margin. We are unable to pass this through to our customers," and said it now bids new jobs at $6.00 a gallon for diesel. A beverage producer said customers "have hit the limit on what they can pay," with pushback and cancellations. A machinery maker said diesel was hurting its margins but that it still expects a record year on its backlog.

Who feels it downstream

When a materials supplier bids at $6 diesel, the cost lands on its buyers: contractors who pour concrete and the haulers who move it. CheckThisBiz lists 670,241 independent businesses in Texas, including 12,896 construction businesses and 2,868 trucking and freight operators, more than in any other state in both categories. A contractor pricing a job for spring may see that fuel assumption built into material quotes.

What we're watching

The outlook cooled even as current activity picked up. Expected general business activity six months out fell to 20.8 from 37.2, and future employment fell to 18.1 from 34.5. National job openings data are due Tuesday, and the next Texas manufacturing release is Oct. 26. More on rates and the economy: economy, crude oil chart.

Sources: Federal Reserve Bank of Dallas, Texas Manufacturing Outlook Survey, September 2026; Dallas Fed special questions, September 2026; CheckThisBiz business counts. The margin example is our illustrative calculation. This is market information, not investment advice.