Chicago Federal Reserve releases its National Activity Index and the Dallas Fed releases its Texas Manufacturing Outlook Survey.

It was the best of times (in Texas) and the worst of times (everywhere else)  .  .  .    (Well, almost …)

The Dallas Federal Reserve released its Texas Manufacturing Outlook Survey for September on Monday.  Unlike the Chicago Fed’s report, which was also released on Monday, the Dallas Fed’s report was a regional report.  In fact, it was the last of three regional Fed reports, following the Empire State Manufacturing Survey and the Philadelphia Fed’s Business Outlook Survey.  Although the tone of the Dallas Fed’s report was upbeat, it revealed that manufacturing conditions remained contractionary in Texas.  Despite economists’ expectations that the report’s general activity index would increase from August’s negative 1.6 to positive 0.5 in September, the index increased only to a “less bad” negative 0.9.  Any result below zero indicates contraction.

From the report:

Texas factory activity increased in September, according to business executives responding to the Texas Manufacturing Outlook Survey.  The production index, a key measure of state manufacturing conditions, rose from 6.4 to 10, suggesting stronger output growth.

Other measures of current manufacturing activity also indicated growth in September.  The new orders index rose to 5.3 following a reading of zero last month, suggesting a pickup in demand.  The capacity utilization index advanced from 1.7 to 9.3, largely due to fewer manufacturers noting a decrease.  The shipments index rose to 4.5, bouncing back into positive territory after falling to -2.3 in August.

Indexes reflecting broader business conditions were mixed.  The general business activity index remained slightly negative but edged up from -1.6 to -0.9.  The company outlook index was positive for the fifth month in a row but fell slightly to 2.4 from a reading of 4.1 in August.

The Chicago Federal Reserve’s National Activity Index (CFNAI) for August revealed deteriorating conditions rather than the “less bad” conditions discussed in the Dallas Fed’s report.  The Chicago Federal Reserve’s National Activity Index decreased to negative 0.87 from negative 0.12 in July.  The CFNAI is based on a weighted average of 85 indicators.

From the report:

Led by declines in production-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to -0.87 in August from -0.12 in July.  All four broad categories of indicators that make up the index deteriorated from July, with each making a negative contribution to the index in August.

The index’s three-month moving average, CFNAI-MA3, decreased from -0.26 in July to -0.47 in August – its lowest level since June 2011 and its sixth consecutive reading below zero.  August’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend.  The economic growth reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.

The CFNAI Diffusion Index also moved lower in August, declining to -0.23 from -0.08 in July.  Twenty-six of the 85 individual indicators made positive contributions to the CFNAI in August, while 59 made negative contributions. Twenty-nine indicators improved from July to August, while 55 indicators deteriorated and one was unchanged.  Of the indicators that improved, 12 made negative contributions.

The major ETFs expected to respond to the Dallas Fed’s Texas Manufacturing Outlook Survey and the Chicago Fed National Activity Index are:

Industrial Select Sector SPDR ETF (NYSEARCA:XLI)  +0.30%

Materials Select Sector SPDR ETF (NYSEARCA:XLB)  -0.17%

iShares Dow Jones US Industrial Sector Index Fund (NYSEARCA:IYJ)  -0.06%

Consumer Staples Select Sector SPDR Fund ETF (NYSEARCA:XLP)  +0.32%

iShares Dow Jones US Financial ETF (NYSEARCA:IYF)  +0.19%

Bottom line:  Although the Dallas Federal Reserve’s Texas Manufacturing Outlook Survey indicated improving conditions, the report’s general activity index continued to indicate contraction.  The Chicago Fed’s National Activity Index made a significant decline to -0.87 from -0.12.

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About John Nyaradi (http://www.wallstreetsectorselector.com) John Nyaradi is Publisher of Wall Street Sector Selector: Your Home For ETF Investing! John writes a weekly guest column, John Nyaradi’s ETF Edge for MarketWatch.com and his investment articles have appeared in many online publications including Trading Markets, Money Show, Yahoo Finance, Investors Insight, Fidelity, ETF Daily News, iStock Analyst , among many others. His book, Super Sectors: How to Outsmart the Market Using Sector Rotation and ETFs, is published by John Wiley and Sons and included among the Years Top Investment Books in the 2011 Stock Trader’s Almanac.