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Dallas Beige Book

June 3, 2015

The Eleventh District economy grew at a slightly slower pace over the past six weeks than in the previous report. Manufacturers mostly reported steady or weaker demand. Retail sales rose at a weaker-than-expected pace but auto sales were generally strong. Demand for nonfinancial services improved, and real estate activity generally remained solid. Loan demand rose at a slower pace than in the prior reporting period. The energy sector continued to decline, while rainfall notably improved District agricultural conditions. Price pressures remained subdued and employment held steady or increased. Outlooks were mostly positive, but weaker in a few sectors compared with the prior report.

Prices

Most responding firms said prices held steady over the past six weeks. Manufacturers generally reported stable selling prices and input costs. Retailers and auto dealers noted steady prices, and staffing and professional and technical services firms said billing rates were unchanged since the prior report. Airlines reported lower fees and airfares. Leisure and hospitality contacts noted slower growth in costs, and a trucking company reported raising rates to cover increased labor costs.

The price of West Texas Intermediate crude oil and natural gas rose over the reporting period, but firms remained pessimistic in their outlook for 2015. Retail gasoline and on-highway diesel prices increased moderately as well.

Labor Market

Employment in most industries held steady or increased, but there were reports of layoffs. Auto dealers, retailers and professional and technical service firms noted stable employment, except for one retail firm that reported hiring for new store locations. Airlines, staffing and transportation services firms reported slight increases in payrolls, and construction contacts continued to report a tight labor market. Some construction-related materials manufacturers reported layoffs due to weaker-than-expected demand. Two energy firms said that after cutting new hires, contractors and some employees, they were now using retirements to reduce staff.

Wages were mostly flat to up from six weeks ago. Contacts noted continued upward wage pressure for skilled workers in construction and high-tech manufacturing. Transportation manufacturers said healthcare costs were driving up compensation costs, and airlines, primary metals manufacturers and staffing and transportation services firms noted slight upward wage pressures. In contrast, a few firms reported reduced wage pressure and said it was easier to find workers due to layoffs in the oil fields.

Manufacturing

Manufacturers said demand was flat to down over the reporting period, but outlooks remained mostly positive. Demand for construction-related materials was flat. Unusually wet weather, particularly in the Dallas-Fort Worth area, delayed construction activity, but some weakening in demand in Houston was reported as well. Outlooks of construction-related manufacturers were weaker than the prior report. Primary metals producers reported steady demand, although one contact noted weaker-than-expected sales. Fabricated metals producers saw a drop in orders over the past six weeks, which contacts attributed to wet weather, the strong dollar and low oil prices. Food producers said demand was flat during the reporting period but up slightly from a year ago, with the exception of one contact who noted a sharp drop in sales.

Demand for high-tech manufacturing softened over the past six weeks. Contacts noted continued slowing in sales of consumer electronics and communication equipment, and one contact said demand for personal computers remained weaker-than-expected. Contacts expressed concern about second-quarter outlooks, but were cautiously optimistic that overall growth would be positive this year. Demand for transportation manufacturing was unchanged over the past six weeks, but up from year-ago levels. Oilfield machinery sales remained weak and were significantly below year-earlier levels. One contact noted that oil and gas equipment manufacturers were actively seeking work from aerospace and other industries.

Gulf Coast refineries slightly increased operating rates, while chemical producers credited narrower margins and fewer sales to rising foreign production and the strong dollar. Outlooks remained positive, although the refining side of the business continued to be more profitable than chemicals.

Retail Sales

Retail sales increased at a slower pace than the previous reporting period and below contacts' expectations. Retailers attributed slowing growth to the strong dollar, which has crimped tourist spending, and to West Coast port congestion, which delayed shipments of seasonal goods. But one respondent added that business in general was slower than expected. Three national retailers said Texas sales underperformed the national average, while one national retailer said Texas was in line with the nation. Outlooks were optimistic and contacts expect overall sales to increase this year.

Automobile demand continued to be strong, although one contact said that sales were below expectations because of a slight slowdown in the local economy and unusually wet weather. Inventories were in good shape, and one contact noted that auto manufacturers were more confident in general and less worried about oversupply than they have been since the recession. Outlooks were optimistic.

Nonfinancial Services

Most nonfinancial services firms reported a slight pickup in demand, and outlooks were more optimistic than in the prior report. Demand for staffing services was the strongest in Dallas, although some contacts said demand in Houston had improved since the last report. Finance, accounting, auditing, food service and hospitality were noted as areas of strength. Demand for professional and technical services rose slightly. A software programing firm continued to report strong demand, particularly in Houston and Austin. Accounting firms said tax business continued to wind down, but year-over-year growth remained robust. Law firms saw a decline in litigation activity and in demand from energy firms but increased real estate and financial work.

Sea and courier cargo volumes rose over the reporting period, while air and rail cargo volumes declined and reports from trucking firms were mixed. Outlooks among transportation services firms were positive. Airlines said passenger demand was unchanged over the past six weeks, but below year-ago levels. The outlook for domestic travel remained positive, while the outlook for international travel, particularly to South America, was weak. Leisure and hospitality contacts said demand growth slowed during the reporting period. Activity in and around major cities continued to be strong, while demand in oil-producing areas of South Texas and the Permian Basin slowed notably.

Construction and Real Estate

Home sales continued to grow, but reports on the pace of growth were mixed. Contacts in Austin and Dallas-Fort Worth reported continued strong demand. Contacts in Houston saw continued strength in home sales at lower price points, but reported softening in sales of mid-priced new homes. Lot deliveries and new home starts were delayed in part due to unusually wet weather across much of the state. Apartment demand remained strong.

Commercial real estate activity was generally strong, and outlooks were cautiously optimistic. Demand for office space was fairly solid, except for in Houston where leasing activity slowed and contacts noted an uptick in the level of sublease space. A few energy firms in Fort Worth are also seeking to sublease office space. Industrial and retail leasing and construction remained active, with industrial demand in Dallas-Fort Worth shifting from large to small and mid-sized tenants.

Financial Services

Overall loan demand increased at a slower pace than in the previous report. Business lending generally slowed in the last month, largely driving this deceleration. Consumer lending, however, picked up for some contacts. Loans to auto dealers as well as consumer auto loans grew at a faster clip, and growth in mortgage lending ticked up. Commercial real estate loans continued to grow strongly, especially in Dallas and Austin. Default rates and charge-offs on loans were at all-time lows, indicative of strong loan quality. Deposit volumes fell at consumer lending-based banks, however, deposits at business lending-based banks continued to increase at a moderate pace. Net interest rate margins continued to squeeze bank earnings amidst tough competition and low interest rates. Outlooks deteriorated since the last report.

Energy

The rig count and demand for oilfield services fell in the Eleventh District, with losses concentrated in the Permian Basin. Outlooks remain negative, with most firms expecting a 30 and 40 percent drop in capital expenditures this year and further cuts in 2016. One silver lining is that contacts said industry costs continued to decline, with firms reporting 20 to 30 percent reductions in drilling and completion costs since the beginning of 2015.

Agriculture

Significant rainfall across much of the district greatly improved soil moisture and pasture conditions and helped replenish ponds and lakes. However, wet field conditions prevented some producers in South Texas from planting crops by the insurance deadline, and the heavy storms in North Texas damaged some of the wheat crop. Prospects for the 2015 crop year are nonetheless strong, with above-average yields expected. Grain prices generally moved down and cotton prices remained below profitable levels for producers. The cattle sector continued to benefit from strong demand and historically high prices.

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