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Dallas Beige Book

April 15, 2015

The Eleventh District economy grew at a moderate pace over the past six weeks, similar to the prior reporting period. Manufacturers mostly reported steady or increased demand. Retail reports were more mixed, but reports of automobile sales were consistently positive. Demand for nonfinancial services improved or held steady, and real estate activity remained solid. The energy sector continued to decline. Price pressures were muted and employment held steady or increased. Outlooks remained cautiously optimistic to quite positive, except for in the energy sector where outlooks were negative.

Prices

Most responding firms said prices held steady over the last six weeks. Retailers noted elevated transportation costs because of the West Coast port strike, while a few other industries--transportation services, airlines, and food and construction-related manufacturing--said lower fuel prices reduced transportation costs. Restaurant contacts said selling prices moved up to accommodate continued increasing costs and that further prices increases are expected by the third quarter.

The price of West Texas Intermediate crude oil trended down over the course of the reporting period. Energy contacts regard the oil price decline as transitory, but most expect that prices will not recover to the level of recent years any time soon. The price of natural gas mostly remained under $3 per MMbtu. Retail gasoline prices rose moderately over the past six weeks while diesel prices rose then fell to near the level seen at the beginning of the reporting period.

Labor Market

Employment in most industries held steady or increased, with more reports of hiring than in the last report. Hiring was noted by most airlines and restaurants, and scattered employment increases were seen among staffing, retail and transportation services firms. Several manufacturers increased payrolls over the reporting period, although an oilfield machinery manufacturer laid off 10 percent of its workers in response to plummeting demand, and the company expects to lay off another 10 percent next month. Oil and gas producers and oilfield service firms continued to cut their workforce as low oil prices forced deeper cost cutting, although many contacts expressed confidence that industry employment declines will be temporary. Shortages of skilled construction workers persisted.

Contacts reported wages were flat to up from six weeks ago. An auto dealer gave a raise to mechanics and an airline recently increased pay for pilots and flight attendants. Wages rose slightly in transportation services, and some upward wage pressure persisted in metals manufacturing. A retailer and a primary metals manufacturer remarked that Walmart's announcement about raising their base wage could lead to wage increases in order to stay competitive.

Manufacturing

With a few exceptions in industries heavily impacted by falling oil prices, most manufacturers said demand was flat to up, and outlooks were unanimously positive. Primary and fabricated metals producers said demand rose over the reporting period. Food producers said demand increased strongly and was up significantly from a year ago. Contacts in high-tech manufacturing reported demand was up but growth cooled over the past six weeks. Respondents said demand for personal computing devices weakened and one contact noted risks to international sales associated with the strengthening dollar.

Demand was flat to down for lumber, cement, and brick manufacturers, with most contacts citing low oil prices and bad weather as dampening factors. A few contacts noted that some commercial work was put on hold due to low oil prices. An oilfield machinery manufacturer said demand declined notably but he expects that the energy industry will begin showing signs of improvement in the second quarter.

Refineries along the Gulf Coast reported increased operating rates, on a seasonally-adjusted basis. Chemical producers reported lower prices and margins, and lower exports because of the strong dollar. The outlook among refiners remained optimistic while chemical industry contacts were less positive.

Retail Sales

Retail sales reports were mixed this reporting period, ranging from down slightly to up slightly. Contacts noting lower demand cited unusually cold weather as the main factor. National retailers noted that Texas sales slightly lagged the rest of the nation over the last six weeks. Some retailers have lower inventory levels because of the West Coast port strike. Outlooks for the rest of the year were optimistic, with some caution over the strength of the U.S. dollar.

Automobile sales continued to increase, although cold weather constrained the pace of growth. Demand was up year over year. Contacts said they may see some slowing in demand growth later this year depending on the extent of the effect of the energy industry slowdown and if interest rates go up.

Nonfinancial Services

Most nonfinancial services firms reported demand was flat or up from six weeks ago, and outlooks were optimistic. Staffing firms said Dallas was the source of much of the demand growth in Texas, while demand abated in Houston and Fort Worth, with low oil prices cited most often as the basis for the weakness. Finance, IT, accounting, and hospitals were noted as areas of strength, while sectors within or supporting the oil and gas industry were seeing the biggest pullback. Demand for professional and technical services experienced a broad-based increase over the reporting period, with a rise in business for accounting, legal and consulting services. Tax and audit services were experiencing seasonal highs, and law firms noted more work in mergers and acquisitions, bankruptcies, and litigation.

Sea, air and courier cargo volumes were up over the reporting period while rail cargo volumes were down. Air cargo contacts noted that volume growth in the international market outpaced that in the domestic market. Outlooks among transportation services firms were positive but there was uncertainty about how the cancelation of new energy projects would affect cargo levels. Airlines reported passenger demand was unchanged from six weeks ago and said the South American market continued to be weak. The outlook for domestic travel remained positive while the international outlook weakened from the time of the last report. Contacts in leisure and hospitality said demand was moderate to strong and noted that unusually inclement weather early in the reporting period dampened demand but business bounced back sharply in recent weeks.

Construction and Real Estate

Housing activity generally remained solid, and outlooks for the remainder of the year were positive. Home sales continued to rise, but reports on the pace of growth were mixed. Contacts in Dallas-Fort Worth reported weather-related weakness in the earlier part of the reporting period but said sales picked up in the latter half. Respondents in Houston noted continued strength in sales at lower price points, but noted softening in sales activity at the higher price points. Construction-related manufacturers said they saw a dip in homebuilding, particularly in Houston. Overall apartment demand stayed strong and rent growth was solid, particularly in Dallas-Fort Worth where occupancy was at a multiyear high. Multifamily construction remained at high levels, although contacts said some projects in Houston have been put on hold or cancelled.

Commercial real estate activity generally held steady since the previous report, and outlooks were cautiously optimistic in the near term. Demand for office space remained fairly solid, with the exception of Houston where contacts noted slower net absorption and an increase in the level of sublease space on the market. Industrial and retail demand remained stable or increased slightly.

Financial Services

Eleventh District loan demand increased slightly in the last six weeks. Commercial real estate loan growth in Austin and Dallas remained robust, but weakened somewhat in San Antonio. Contacts noted steady growth in consumer lending, and improved demand in agriculture and residential real estate lending. Loan quality continued to improve, even with the anticipation of negative effects of sustained low oil prices. Deposit volumes continued to grow at a steady clip, and one contact noted that competitors were beginning to gently increase deposit rates. Low interest rates on loans continued to squeeze bank earnings, and competition for loan deals remained tough. Outlooks improved since the last report, but contacts remained cautious.

Energy

The rig count and demand for oilfield services declined in the district, with losses concentrated in the Permian Basin and Eagle Ford areas. Contacts noted that larger service firms were better off than smaller ones, as they were better able to negotiate with producers on the volume and price of services. Contacts also said firms were better hedged this time around than in previous downturns and so far have generally been able to get funding, restraining any increase in mergers and acquisitions. Outlooks remained negative for 2015, with an expected 30 to 40 percent drop in capital expenditures.

Agriculture

Rainfall improved soil moisture and pasture conditions across much of the district, but severe drought persisted in parts of Texas, particularly in the north. Wet field conditions caused planting delays in some areas of South and East Texas. A shift in some acreage from cotton to sorghum is expected this year as farmers react to low cotton prices. Cotton prices remained below a profitable level for farmers, while cattle prices increased seasonally and were very high.

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