Dallas Beige Book
October 16, 2013 · Dallas Beige Book Reports
The Eleventh District economy expanded at a moderate pace over the past six weeks. Manufacturing activity increased overall and retail sales edged up. Services firms reported mixed demand. The housing sector remained strong, with rising construction and sales. Office and industrial leasing activity picked up. Financial institutions said loan demand was flat to up modestly. Energy activity remained at high levels, and the severity of drought conditions eased somewhat. Prices held steady or rose at most responding firms. Employment levels were flat or slightly increased, and wage pressures picked up.
Contacts said prices were stable or up over the reporting period. Manufacturers reported flat prices with the exception of increases in cement, brick, and paper. Contacts noted no change in retail or automobile prices since the last report. Accounting and legal firms noted modest increases in billing rates, and shipping rates increased in light of higher fuel costs. Airlines reported mostly flat ticket prices but higher fees. Home prices rose notably, and several real estate contacts noted strong growth in office and apartment rents. There were some reports of increased input costs, particularly for steel, rubber, beef, and dairy products.
Changes in energy prices were mixed; natural gas prices held steady while the price of West Texas Intermediate crude oil fell slightly over the reporting period. Gasoline and diesel prices declined modestly from six weeks ago.
Employment levels held steady or increased slightly at most responding firms. Scattered reports of hiring came from staffing services, high-tech firms, fabricated metals and food manufacturers. Retail hiring was generally limited to new stores, and headcounts rose at law firms as fall associates came on board. Reports of labor shortages eased somewhat from earlier in the year, although construction firms cited difficulty finding subcontractors, and some respondents noted a competitive job market for accountants and financial analysts.
Reports of pay increases were more widespread than in prior periods. Accounting firms noted strong increases in wages and bonuses. A retail contact reported upward wage pressure for IT workers, and wages rose in fabricated metals and construction-related manufacturing. Legal and finance firms said raises will be modest but above what was given last year.
Most responding firms noted an increase in manufacturing activity over the reporting period. Construction-related manufacturers said demand was flat or up, and a brick contact noted a sharp rise in residential projects. Fabricated metals demand continued to rise, supported by the energy sector and road construction, while demand for primary metals softened slightly but remained at or above year-ago levels. Demand increased for paper and food producers.
High-tech manufacturers said orders were flat to slightly up, and one semiconductor firm noted demand increased for three consecutive quarters for the first time since 2010. Respondents expect mild growth to continue over the next three to six months.
Some transportation manufacturing contacts reported sizable increases in demand. An automobile manufacturer said a pickup in construction prompted a rise in demand for light trucks, and that orders exceeded production capacity. Contacts expect 2013 to be on par with 2012 or slightly stronger.
Petrochemical producers noted decreased production in August, although year-to-date production was slightly above what it was during the same period last year. Increased oil prices provided further support to the cost advantage of domestic petrochemical firms, but softening global demand and unplanned outages suppressed exports.
Respondents reported that retail sales were up slightly over the reporting period, and year-over-year demand was up in the low to middle single digits. Two national firms reported that retail activity in Texas continued to marginally outperform activity in the nation. Contacts’ outlooks for the next six to twelve months are cautiously positive.
Automobile sales held fairly steady overall. Demand was up year over year but not as much as expected, possibly due to a lack of confidence among buyers. Inventories were in line with respondents’ expectations. Contacts have positive outlooks for the fourth quarter and into 2014.
Nonfinancial services contacts reported mixed demand. Staffing services firms noted flat demand overall since the last report but saw an unexpected decline in direct hires. One contact saw a few signed contracts designed to circumvent the Affordable Care Act (ACA) by utilizing a temporary employee full time, then hiring that person on a permanent but part-time basis when the ACA goes into effect. Accounting firms noted demand was up seasonally due to upcoming tax deadlines, and also up modestly year over year. Contacts expect the strong demand to continue, with a further pickup in transactions work. Legal firms reported a modest decrease in demand. Litigation and corporate transactions work remained slow, and demand fell for healthcare and land use legal services. Intellectual property litigation increased and real estate work remained elevated, although it abated recently. The outlook for legal services is guarded and lawyers are less bullish than in prior periods.
Transportation service firms said container and cargo volumes increased over the reporting period, except for air cargo, which held steady. Loaded container volume was up in August and up year to date compared with the same period in 2012. Strength was reported in retail imports in advance of the holiday season, and the growth was stronger than last year. Small parcel cargo volume grew at an accelerating pace in August, with growth driven by e-commerce. Air cargo volume was largely unchanged over the reporting period, both domestically and internationally, and was down slightly on a year-to-date basis when compared with last year. Contacts noted a continued trend toward cargo being carried less by passenger aircraft and more by cargo airlines.
Airline contacts noted a seasonal decline in passenger demand over the past six weeks, although demand was slightly stronger than year-ago levels. Travel to Latin America and Europe was robust while travel to Asia was weak. Firms expect the fourth quarter to compare favorably to the fourth quarter of last year, and one contact is optimistic that 2014 will be stronger than 2013.
Construction and Real Estate
The District housing sector remained strong over the reporting period. Respondents said most major Texas markets continued to record robust sales, while demand slowed in some parts of the U.S. Home prices continued to rise, due in part to low inventories of existing homes and finished lots. Contacts expect the pace of price increases to moderate slightly when new home construction catches up to demand. The summer’s rise in mortgage rates had little effect on demand and reduced affordability only slightly, according to respondents. Contacts expect steady demand through the rest of the year and anticipate construction levels in 2014 will pick up further. Healthy apartment demand pushed occupancy rates higher despite high levels of multifamily construction activity. Increases in rents were strong in several major metros, and contacts are optimistic in their outlooks for 2014.
Office and industrial leasing activity strengthened, especially in Dallas and Houston, and contacts noted strong growth in rents for class A office space. Several respondents noted a pickup in investment sales for office and industrial buildings. Outlooks for Texas commercial real estate remained optimistic.
Loan demand remained soft and was flat to up modestly from six weeks ago. Demand for mortgages was robust, although increased mortgage rates lowered demand from exceptionally high levels and led to less mortgage refinancing. Loan quality was good and continued to improve modestly. Financial institutions were able to sell real estate owned properties for gains. Loan pricing remained extremely competitive, with big banks undercutting community banks, especially in Austin. Deposit volumes and rates did not change, but there was some competition in rates for certificates of deposit. Outlooks are cautiously optimistic, with mortgage lending expected to remain strong and small business lending expected to increase.
Respondents said that energy activity was little changed at high levels over the reporting period. Activity was better than a year ago, but margins for oil and gas services firms have tightened. Global demand held steady. Oil and gas extraction firms continued to expect modest improvement through the end of 2013 and into 2014.
The District remained largely in drought, although the severity lessened in late September in Texas due to good rainfall and the excessive heat tapering off. The harvest progressed normally for row crops, and conditions were mostly fair to good. Improved moisture conditions increased optimism for the winter wheat crop. Beef exports increased over the reporting period.
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