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Dallas Beige Book

January 14, 2015

The Eleventh District economy expanded at a slightly slower pace over the past six weeks than in the previous report. Manufacturing activity continued to increase. Retailers and automobile dealers saw steady or higher sales. Growth in loan demand picked up, and demand for nonfinancial services was stable or improved. Home sales grew, and apartment and office leasing activity remained strong. Demand for oilfield services declined modestly, while agriculture conditions improved a little. Upward price and wage pressures moderated slightly. Employment in most industries held steady, but there were some layoffs. There was more uncertainty and generally less optimism in outlooks than in the prior report, with contacts across several industries expressing concern about the impact of lower oil prices on the District economy.

Prices

Most responding firms said prices held steady over the last six weeks, with fewer instances of firms raising prices than in the previous report. Retailers and auto dealers noted steady prices, and accounting and legal firms said billing rates were unchanged since the prior report but higher than a year ago. Prices and fees generally moved up across the staffing industry in part due to higher costs. One primary metals manufacturer said they were finally able to pass through a slight price increase, while food and fabricated metals producers noted continued increases. Other manufacturers generally reported stable prices. Cement, glass, and brick manufacturers noted plans to raise prices in 2015. There were reports of lower cotton, dairy, and meat prices, and a few contacts said energy firms were requesting discounts on machinery pricing.

The price of West Texas Intermediate crude oil fell sharply over the reporting period, as global supply growth met softer international demand. The price of natural gas dropped, as did gasoline and on-highway diesel prices.

Labor Market

Reports of hiring were slightly less widespread than in the prior report, and there were scattered reports of layoffs. A few energy firms reported hiring freezes and layoffs. Staffing firms, auto dealers, and cement, high-tech, and fabricated metals manufacturers reported increased payrolls. Retailers mostly noted flat employment levels, but one contact reported ongoing hiring in line with sales growth. Construction contacts continued to report a tight labor market.

Reports of rising wage pressures were less prevalent than in the previous report. Staffing services firms noted continued wage pressures, particularly for certain sectors and positions, although one firm said companies continued to resist wage increases. Upward wage pressure on semi-skilled positions in manufacturing eased, but contacts noted continued pressure for high-skilled labor mostly in high-tech and food manufacturing. Airlines reported higher salaries, and one brick manufacturer said they plan to increase wages in the near future.

Manufacturing

Most manufacturers noted stable or higher demand since the last report, and outlooks were positive. Reports on demand growth from lumber, cement, glass, and brick manufacturers were mixed, but all contacts noted that business was up from a year ago. Primary metals producers saw a seasonal dip in demand, while fabricated metals manufacturers continued to note increases.

High-tech manufacturers said overall demand held steady over the last six weeks, but they noted that demand for high-speed processors, in particular, picked up recently. Respondents expect sales growth in 2015 to be slower compared with the past several years, but to remain well above the long-term trend. They also anticipate growth in electronic devices to outperform the rest of the industry.

Food producers said demand was unchanged over the reporting period and flat from a year ago. Chemical producers reported higher production rates in November compared with year-ago levels. Gulf Coast chemical manufacturers, who use natural gas to fuel their operations, said the lower price of oil has narrowed their competitive edge over their foreign competitors that rely more on oil for production. This development, combined with weaker global demand and a strong dollar has led to a decline in exports of chemical products. Refinery utilization rates increased, and outlooks for refiners and chemical manufacturers remained positive.

Retail Sales

Retail demand grew during the reporting period, but reports on the pace of growth were mixed. Two national retailers said Texas' sales performance was a bit slower than the nation overall, while a third national retailer noted Texas was in line with the national average. Black Friday weekend sales were in line with or above retailers' expectations. Contacts reported uncertainty in their outlooks for 2015 partly due to lower oil prices and possible price declines for some meats, produce, and pharmaceuticals.

Automobile sales held steady or increased slightly, and demand was up from a year ago. Inventories were generally high because of the low cost of carrying inventory. Some auto dealers were front loading inventory of Ford trucks as the new model will be slow to roll out. Outlooks for 2015 were positive.

Nonfinancial Services

Most nonfinancial services firms reported flat or higher demand and positive outlooks. Reports on demand for staffing services were mixed, with some contacts noting strong increases, while others noted a slight decline. One staffing firm noted a slowdown in hiring in Houston. All skills were in demand, with one contact reporting a significant increase in orders from the engineering, IT, and finance sectors. The accounting sector continued to operate at high levels of activity, and year-over-year growth was nearly in the double digits according to most responding firms. Demand for legal services increased slightly, but one firm said their Houston office experienced a slight dip in activity. Litigation activity remained slow. Bankruptcy work was beginning to pick up, and one contact reported that an oil and gas firm was looking into bankruptcy options. Legal services to financial practices, particularly in private equity, continued to grow but contacts said that activity may slow next year if oil prices remain low.

Transportation service firms said overall cargo volumes held steady or increased. Shipping cargo volumes increased, boosted by notable growth in steel tonnage, and trucking firms reported stable demand. Airlines said passenger demand held steady since the previous report but was up slightly from a year ago. Domestic airline demand remained strong, and outlooks were positive.

Construction and Real Estate

Home sales grew at a steady to slightly slower pace since the last report, and sales were generally even with last year's levels. Builders were slowly building up their inventory of speculative homes, but some contacts said that their appetite for land has declined. Home prices continued to edge upwards, and several respondents reported pushback from buyers on pricing. Outlooks were cautiously optimistic. Apartment demand remained strong. Occupancy rates, although still high, saw a slight seasonal dip. Rent growth stayed solid in Dallas and Houston, but was starting to cool off in Austin. Outlooks were generally positive, but some contacts said they had revised down their 2015 outlook for Houston.

Office leasing activity remained strong, but one contact noted a slight pull back in demand from oil and gas firms. Industrial demand was solid in Houston but slowed in Dallas. A few contacts said that investors are taking a wait-and-see approach because of the steep decline in oil prices. Outlooks were positive, but there was some concern about the elevated level of construction in the Houston office and Dallas industrial markets.

Financial Services

Overall loan demand accelerated slightly since the previous report. Growth in consumer lending picked up, and business lending outside of the oil and gas sector increased. In contrast, community banks in areas focused on oil and gas said they were seeing some signs of slowing. Demand for multifamily housing continued to drive growth in commercial real estate lending, but one contact said that their lending standards are becoming pickier. Outlooks remained optimistic, but contacts were concerned that sustained low oil prices may slow Texas growth in 2015.

Energy

Demand for oilfield services fell in the Eleventh District. Declines were concentrated in the Permian Basin as firms moved away from traditional vertical drilling, but the Eagle Ford and other oil basins in the District also saw a slight drop off in activity. Outlooks for the first half of 2015 are very uncertain and significantly weaker than in the prior reporting period, with firms expecting anywhere from a 15 to 40 percent decline in demand for their services.

Agriculture

Agricultural conditions improved slightly, but large portions of the state remain in drought. Harvesting has wrapped up for all row crops, except cotton, which has been slow this year and is nearing completion. Winter wheat has been planted and some areas look good with ample moisture received, while other areas need more rain to yield a decent crop and good grazing conditions. Cattle prices have declined slightly but remain near record highs. Dairy prices are markedly lower due to increased global production.

Find the full Beige Book report at www.federalreserve.gov/monetarypolicy/beigebook/default.htm