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Dallas Beige Book

July 15, 2015

The Eleventh District economy grew at a moderate pace over the past six weeks. Manufacturers mostly reported steady or weaker demand. Retail sales increased and auto sales were generally strong. Demand for nonfinancial services held steady or improved, and real estate activity generally remained solid. Loan demand rose slightly, and demand for oil field services held steady. Continued rainfall further improved agricultural conditions. Price pressures remained subdued and employment held steady or increased. Outlooks were mostly positive, except in the energy sector where they were negative.

Prices

Prices generally held steady or declined. Staffing firms noted downward pressure on fees from clients, and an airline reported lower fuel surcharges and airfares. Most manufacturers noted no change in selling prices, except for cement and fabricated metal manufacturing firms, which reported lower selling prices due to increased competition, particularly from imports. Chicken prices declined rapidly as a result of an outbreak of avian flu outside the district, but egg prices have skyrocketed according to contacts. A trucking firm said rates were up due to tight capacity, and contacts in food services noted higher input costs and plans to raise prices in the fourth quarter.

Oil and natural gas prices were relatively stable compared to the prior reporting period. The price of on-highway diesel edged down, while retail gasoline ticked up seasonally.

Labor Market

Employment in most industries held steady or increased. Auto dealers and retailers noted job gains and said that filling open positions was somewhat easier in areas near the oil fields. Hiring was noted by some professional and technical, financial and food services firms. Construction contacts continue to report a tight labor market particularly for skilled trades, but one contact in Houston noted a decline in unskilled labor costs. Some fabricated metals and high-tech manufacturers reported layoffs. Some downsizing continues in the energy sector but massive layoff announcements are largely finished and contacts said the industry has weathered the downturn well so far.

Wages were mostly flat to up from six weeks ago. Continued upward wage pressures for truck drivers were reported, with one firm noting that salaries were up 10 percent year over year due to shortages. Two staffing firms said that employers were considering raising wages across the board to retain productive workers. Some primary metals manufacturers increased starting salaries in part due to skilled labor shortages and to keep up with pay raises at Walmart. Food services and petrochemicals contacts generally noted easing wage pressures.

Manufacturing

Most manufacturers noted steady or weaker demand. Demand for construction-related materials was mixed. Cement producers said demand fell over the reporting period, which they attributed largely to the effects of wet weather on construction activity, although one contact cited the slowdown in oil filed activity as a factor as well. Brick and lumber manufacturers saw a slight uptick in orders since the prior report, still demand remained below year-ago levels. Demand for primary metals held steady or fell since the last report, with one manufacturer noting a 20 percent year-over-year decline in orders in the second quarter. Fabricated metals producers noted improved demand.

Demand for high-tech manufacturing weakened during the reporting period, and contacts said revenue growth so far in the second quarter has been lower than projected. Weakness continued to stem from slowing in sales of personal electronics devices, particularly PCs, and communications infrastructure equipment. Outlooks were weaker than earlier in the year. Demand for transportation equipment manufacturing was mixed over the past six weeks. Aerospace parts manufacturers reported steady to higher sales. A large automobile manufacturer noted increased demand for trucks, SUVs and minivans because of low fuel prices, while a recreational vehicle manufacturer noted declining sales. Food producers said demand was flat during the reporting period as well as compared to last year, with the exception of one contact who noted a sharp decline in sales.

Refinery utilization rates remained strong. Domestic demand growth for gasoline was higher than expected, and refiners anticipate healthy year-over-year growth during the current summer driving season. Chemical producers said export demand remained weak because of the strong dollar, and domestic demand was sluggish because of weakness in industrial production and the effects of weather on construction activity in the first half of the year.

Retail Sales

Retail sales increased over the reporting period. Retailers reported strong Mother's Day-related sales but said that activity weakened somewhat after that. Softer growth in sales was attributed to the wet weather and the strong dollar, which has reduced sales especially along the border. Two national retailers said Texas sales underperformed the national average, while a third national retailer said Texas was in-line with the nation and a fourth said Texas outperformed the U.S. average. Contacts expect continued sales growth and outlooks were mostly optimistic.

Automobile sales remained strong and demand was up year-over-year. A few contacts noted slightly low vehicle inventories, and outlooks for the remainder of the year were optimistic.

Nonfinancial Services

Most nonfinancial services firms reported demand was flat or up from six weeks ago, and outlooks were optimistic. Demand for staffing services was flat to up since the last report. Staffing needs were particularly strong in the professional, healthcare, and financial services sectors, although one contact said demand from all non-oil and gas sectors was solid and that orders from the energy sector had stopped declining as well. Demand for professional and technical services increased modestly in the past six weeks. Accounting firms noted a healthy pipeline of work, including more activity in mergers and acquisitions among oil and gas related firms. Law firms saw a small pick-up in demand for litigation and strong growth in real estate, financial and corporate transactional practices; however, demand continued to soften for energy related projects. A consulting firm reported robust demand and growing international interest in commercial real estate deals in Texas, while a technical services firm noted steady demand.

Sea cargo shipments fell from April to May, but were up notably year to date. Trucking cargo volumes held steady during the reporting period, and contacts said they expect strong demand in the third quarter. Airlines reported a seasonal increase in passenger demand over the past six weeks. Domestic and transatlantic demand remained strong, while travel to South America, particularly Brazil and Venezuela, continued to be weak. Contacts in the restaurant and food services industry said demand grew at a modest pace. Demand was up moderately in the large metro areas but flat to down in smaller rural markets.

Construction and Real Estate

Reports on home sales and buyer traffic were mixed, but outlooks were unanimously positive. Contacts noting slower activity mostly attributed it to wet weather across much of the state. Lot deliveries and new home starts have been significantly delayed due to the rains, resulting in large backlogs and prompting a few builders to limit sales. Contacts expect to see a surge in starts in the second half. Apartment demand was generally robust, rent growth solid and occupancy high, despite elevated construction levels. Dallas-Fort Worth was the strongest market, but San Antonio saw notable improvement as well. While demand and rent growth in Houston remains strong there is some softness in rental rates for Class A product and in construction starts.

Commercial real estate activity generally held steady, and outlooks remained cautiously optimistic. Demand for office space was solid in Dallas-Fort Worth, while contacts in Houston noted slowing in leasing activity and further increases in the level of sublease space. Industrial leasing remained active in both metros; characterized by low vacancy, rising rents and high levels of construction. Retail demand was strong, and retail construction in Dallas-Fort Worth is at a three-year high.

Financial Services

Loan demand ticked up over the past six weeks. Both commercial real estate and commercial and industrial loan growth remained positive, but slowed somewhat since the last report. Contacts said loans to medium-sized businesses remained virtually unchanged although lending to auto dealers and retail stores grew at a slightly faster pace. Deposit volumes rose slower than expected at consumer lending based banks, while deposits at business lending based banks continued to increase at a moderate pace. Loan standards were nearly unchanged, and loan quality remained strong. Outlooks improved slightly since the last report.

Energy

Demand for oil field services was largely flat, and the rig count fell slightly over the reporting period. Industry costs declined further, but contacts said decisions to make further cuts to capital spending still loom as firms reassessed their positions. Many firms have managed to secure funding and are generally not distressed, however, as hedge positions begin to roll off in the fall and borrowing bases are reevaluated, merger and acquisition activity may surge. Small service providers continued to be more distressed as they have less negotiating power for cutting costs and greater difficulty accessing global capital markets.

Agriculture

Continued rainfall caused some localized flooding, but overall it improved growing conditions and spurred the district out of a long drought. There was enough of a break in the wet weather for most producers to catch up on wheat harvesting and planting of cotton and grain crops. The cotton crop is off to a good start, and above-average grain production is expected. Pasture conditions were better than they have been in several years, and cattle producers continued to benefit from high prices.

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