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Dallas Beige Book

March 4, 2015

The Eleventh District economy expanded at roughly the same pace as in the prior reporting period. Manufacturing activity was mostly stable or increased, but there were a few reports of decreased activity. Retailers and auto dealers reported higher sales. Demand for business and transportation services was mixed. Home sales continued on an upward trend and apartment demand remained strong, but office leasing activity held steady or slowed. Demand for oilfield services declined sharply, while agricultural conditions and loan demand improved slightly. Upward price and wage pressures continued to moderate. Employment in most industries held steady or increased. Overall expectations for the future were generally positive, but contacts expressed uncertainty and caution in their outlooks.

Prices

Most responding firms said prices held steady or declined over the past six weeks. Manufacturers generally reported stable selling prices, and flat to lower input costs. Retailers and auto dealers noted steady prices, and accounting and legal firms said billing rates were unchanged since the prior report. Airlines reported lower fees and airfares, and transportation service firms noted declining fuel costs. In contrast, most staffing firms said they had raised billing rates to offset higher costs associated with the Affordable Care Act. Fabricated metals manufacturers noted continued but slower growth in prices, and one transportation service firm reported higher rates.

The decline in the price of West Texas Intermediate crude oil abated toward the end of the reporting period. Natural gas prices mostly remained below $3, despite harsh winter weather in the North East. Gasoline prices rose moderately in the latter part of the reporting period, while on-highway diesel prices and chemical and polymer product prices declined.

Labor Market

Employment in most industries held steady or increased. Retailers and auto dealers noted stable employment levels, while manufacturers noted flat to increased employment. A few staffing, financial and transportation services firms reported increased payrolls, and construction contacts continued to report a tight labor market. Accounting firms said they hired new classes of interns for the tax season, and added that many of them will transition into fulltime jobs. Law firms noted increased competition for top law students, and staffing firms noted strong demand for IT professionals. Energy firms said they have halted hiring and started downsizing, with most expecting payrolls to decline in the first half of the year. Two firms in the retail sector said it was easier to find workers in areas near the oil fields.

Reports of rising wage pressures were less prevalent than in the prior report. Staffing services firms noted little to no wage pressure, and petrochemical manufacturers reported reduced wage pressure, particularly for downstream construction workers. High-tech manufacturers reported continued wage pressures for high skilled positions, particularly in areas with strong growth and low unemployment. Law firms said hiring of Texas lawyers by out-of-state firms establishing practices in Texas had increased wage pressure in the industry.

Manufacturing

Overall manufacturing activity was flat to up, but there were some reports of weaker demand. Construction-related manufacturers reported mixed demand. Cement producers saw a slight dip in orders over the reporting period, which one firm attributed to lower oil prices, while brick and primary metals manufacturers noted stable demand. Fabricated metals firms saw slower growth in sales compared with the prior report, and said demand was well below year-ago levels.

Demand for high-tech manufacturing increased since the last report, with orders for electronic devices growing at a good pace and demand for memory chips remaining very strong. Inventories were at desired levels, and the outlook for the next six months was for continued moderate to strong growth. Food producers saw a modest increase in demand, and remained largely positive in their outlooks. Transportation and machinery manufacturers noted flat to higher demand, with the exception of an oil-field machinery manufacturing firm, which reported a sharp drop in bookings since the prior report.

Gulf Coast chemical producers reported declining export demand. Refinery utilization rates, while still high, decreased slightly in January. Contacts said low oil prices have reduced production growth expectations, resulting in some midstream construction projects being delayed. Outlooks remained positive and margins healthy, although the refining side of the business was more profitable than chemicals.

Retail Sales

Retail sales rose during the reporting period, but the pace of growth was mixed. Demand continued to be up year over year, and a few retailers noted slight improvement in foot traffic since the last report. Two national retailers said Texas' sales performance was in line with the nation overall, while a third national retailer noted Texas was outperforming the national average. Outlooks were positive, and contacts expect modest sales growth over the next three months.

Automobile sales increased over the reporting period, and demand was higher than a year ago. Contacts expect steady demand growth over the first quarter, but reported more uncertainty in their outlooks for the remainder of the year.

Nonfinancial Services

Demand for staffing services was flat to higher, and outlooks were positive, but much more cautious than the last report. Two firms said that strength in demand had shifted slightly away from Houston, which is more affected by energy activity, toward Dallas-Fort Worth, while a third noted a pullback in demand from the oil and gas sector. The accounting sector saw a seasonal increase in activity. Abstracting from seasonal movements, accounting services to auto dealerships was strong, and demand from clients in private medical practice, food services and construction industries held steady. In contrast, low oil prices stalled some projects, and tax advisory work in Houston slowed. Overall demand for legal services held steady, but contacts in Houston noted a slight decline. Litigation and bankruptcy work picked up, but transaction work for law firm offices in Houston slowed moderately. Demand for real estate-related work continued to do well, although Houston showed signs of slowing.

Changes in cargo volumes were mixed, and outlooks of transportation service firms were mostly positive. Trucking firms said cargo volumes declined because of shipping disruptions at West Coast ports, while rail and small-parcel shipments increased in January, and were up year over year. Container traffic trended upwards, largely driven by strength in the Asian and Transatlantic markets. Airlines said passenger demand weakened, particularly to South American markets, and outlooks were slightly less optimistic.

Construction and Real Estate

Housing activity remained solid, and outlooks were mostly positive. Home sales rose during the reporting period, although reports on the pace of growth were mixed. Contacts in Dallas-Fort Worth noted a strong, earlier-than-normal pickup in traffic and sales, while demand in Houston held steady. Home prices continued to edge upward. Land prices were elevated, and several contacts reported decreased builders' appetite for land. Apartment demand stayed strong, particularly for class B space. Rent growth remained solid in Dallas-Fort Worth, but slowed in Houston.

Commercial real estate activity held steady or slowed since the previous report, and outlooks were cautiously optimistic. Overall office leasing activity remained fairly solid; however, contacts said some energy firms are seeking to sublet office space in Houston. Institutional equity for new development has nearly dried up in Houston, and a few projects have been put on hold or cancelled.

Financial Services

Loan demand increased slightly over the past six weeks. Growth in consumer lending remained robust, and commercial real estate, as well as construction and industrial lending, continued to provide a healthy pipeline of work. The quality of loans previously made to oil and gas firms remained high, although contacts expressed concern about the future because of low oil prices. Deposit volumes grew over the reporting period, despite expectations for a slight seasonal decrease. Outlooks were optimistic, but more cautious compared with the previous report. Interest rates on loans remained at historically low levels, and deposit rates continued to hover just above zero.

Energy

Demand for oilfield services fell sharply in the Eleventh District. Declines were concentrated in the Permian Basin and Eagle Ford regions, and contacts reported a pullback in both horizontal and traditional vertical drilling. Outlooks remain pessimistic and uncertain, with firms expecting a roughly 30 percent decline in capital expenditures this year.

Agriculture

Moisture conditions stabilized for a large portion of the District, but drought conditions persisted in some areas. Cotton prices are below profitable levels for most producers. Prices and export demand for sorghum is high, which may lead more farmers to favor sorghum over cotton when making planting decisions this spring. The strong dollar has slowed agricultural exports. Corn, cattle, wheat, soybeans and dairy prices declined over the reporting period.

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