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Dallas Beige Book

September 2, 2015

The Eleventh District economy grew at a modest pace over the past six weeks. Manufacturing demand was mixed. Retail sales were weak, with the exception of strong auto sales. Demand for nonfinancial services held steady or improved, except for railroads which saw decreased cargo volumes. Real estate activity remained solid overall, and loan demand rose slightly. Demand for oil field services remained depressed, and lower oil prices dampened outlooks. Price pressures remained subdued and employment held steady or increased. Outlooks were mostly positive, except in the energy sector.

Prices

Prices and input costs were generally stable, with the exception of transportation costs which fell over the reporting period as the price of fuel moved lower. A package delivery company noted that fuel surcharges will be declining through at least October, and airlines said low fuel prices were helping the industry immensely. Food manufacturers reported input prices were generally stable, but said many prices remain at historically high levels. Selling prices were mostly unchanged, although some restaurant contacts plan to raise prices to offset higher food costs and a cement manufacturer and food producer also initiated a price increase.

Oil prices fell roughly $15 per barrel over the past six weeks, reaching the lowest level since 2009. Gasoline and diesel fuel prices also fell, while natural gas prices moved up slightly.

Labor Market

Employment in most industries held steady or increased, except in the energy sector where another, but smaller, round of layoffs is underway. Airlines noted increased headcounts from a year ago and restaurants said hiring increased, although they reported difficulty finding suitable workers to fill openings in new restaurants. Legal contacts remarked that business in Houston has slowed but that Dallas seems to be picking up the slack.

Wages were mostly flat to up from six weeks ago. A few staffing services contacts mentioned concern about health insurance costs rising next year. Reports of rising wages to attract truck drivers continued, and upward wage pressures were noted for some specialty skills (diesel mechanics, electrical and software engineers) and also low-skill personnel in machinery and food manufacturing.

Manufacturing

Reports from manufacturers were mixed. In construction-related manufacturing, a brick producer attributed a slight rise in demand to improved weather conditions, and a copper wire producer also said demand was better after five soft months due to wet weather. Two cement contacts said the recent drop in oil prices dampened demand and one noted it also delayed plans to expand capacity. A fabricated metals manufacturer remarked that the building boom was getting stronger and an aerospace manufacturing contact said the airline industry was doing great and will be strong for a long time to come.

Demand for high-tech manufacturing was weak over the reporting period. Contacts reported moderate growth in select high-end business products but a general weakness stemming primarily from consumer electronics. High-tech manufacturers noted that slowing growth in Asia has had a significant effect on their expected revenues for the rest of the year, and one respondent noted that they were planning a significant reduction in capital expenditures for next year in response to slowing demand.

Refinery utilization rates were very strong. However, contacts noted that some midstream construction projects were being delayed for the foreseeable future. Domestic sales of PVC have been lackluster this year due to softer demand growth and increased imports (partly due to the strong dollar). The strong dollar also continued to hamper petrochemicals exports.

Retail Sales

The retail sector performed poorly since the last report, with contacts reporting decreased sales year over year. The weakness was partly attributed to the strength of the dollar, and one contact said stores along the Texas-Mexico border continued to perform very badly. Contacts said they expect little to no sales growth for the third quarter, with mixed levels of optimism.

Automobile sales demand held steady at good levels over the reporting period, and contacts said the summer selling season was stronger than last year. One contact was short on inventory from all manufacturers and another expects to see inventory shortages in the near future as manufacturers change over to the new model year. Contacts were optimistic in their outlooks for the remainder of the year.

Nonfinancial Services

Most nonfinancial services firms reported demand was flat or up from six weeks ago, with the exception of railway services. Demand for staffing services was flat since the last report. One contact noted that demand from chemical and logistics had replaced a lot of the lost demand from oil and gas and another said that the recent dip in oil prices has negatively impacted demand from industrial manufacturers. Demand for professional and technical services increased modestly over the reporting period. Accounting firms noted robust demand and law firms noted increased demand for financial transactions. Contacts in the restaurant and food services industry said demand grew at a moderate pace. Demand was up strongly in the large metro areas but flat in smaller markets, primarily those closely tied to oil and gas activity.

Rail cargo volumes were down, with a particularly steep decline in petroleum shipments. Courier cargo volumes increased at an accelerated pace. Retail (especially e-commerce and furniture) and nondurable wholesale (especially pharmaceuticals and apparel) drove growth. Overall, transportation services contacts stated that their outlooks were not as strong as they were a year ago. Airlines reported no change in demand over the past six weeks. One airline said demand was up slightly from a year ago and that they were seeing record earnings. Another airlines contact said they were seeing record load factors and have a significantly improved outlook from a year ago because of the decline in oil prices.

Construction and Real Estate

Reports on home sales and buyer traffic were mixed, but outlooks were unanimously positive. Overall sales of low- to mid-priced homes remained strong, and demand in the Dallas-Fort Worth area continued to be solid. Most contacts that noted slower activity cited seasonal weakness and softness in new home sales at higher price points as factors affecting demand. Home prices continued to trend upward, although many respondents said that builders had less pricing power at higher price points. Apartment demand largely remained strong, except for slight weakening in demand for Class A space in some parts of Houston.

Commercial real estate activity generally held steady, and outlooks remained cautiously optimistic. Demand for office space was strong in Dallas-Fort Worth, while contacts in Houston noted slow leasing activity and slight increases in sublease space. Industrial and retail leasing remained solid and construction active, although one contact said there is somewhat less enthusiasm for new industrial development in Houston.

Financial Services

Loan demand grew at a modest pace over the past six weeks. Mortgage lending ticked up, although growth remained muted due to a limited supply of homes for sale. Commercial and industrial loan growth remained steady. Consumer loans, including auto financing and credit cards, continued to grow at a moderate pace. Growth in deposits was slower than usual, and depositors have slowed renewals on time deposits in anticipation of rate increases. More clients requested fixed rates on loans, which would put pressure on future margins if rates go up. Loan standards were unchanged, and loan quality improved slightly. With low oil prices and recent developments in China, outlooks for loan demand were more cautious than in the last report.

Energy

Demand for oilfield services remained depressed despite the modest uptick in drilling in the Permian Basin. In addition to more job cuts, further cuts to capital spending have been announced, although these cuts are smaller than the initial round and are expected to be the last round of cuts for 2015. Multiple contacts reported that the credit situation is worsening for small to midsize producers as balance sheets deteriorate and the likelihood of a significant increase in oil prices has declined. In general, more contacts are resigned to "lower for longer" oil prices. Outlooks for the next two quarters are negative.

Agriculture

Parts of the district--namely East Texas--have gotten dry again, but overall moisture conditions remained favorable for agricultural production and livestock grazing. The harvest of row crops is underway in some areas and yields have been good overall but quite variable based on when the crops were planted and how wet the fields were at that time. The cattle sector continued to benefit from good pasture conditions, low feed costs and high selling prices, which has prompted herd rebuilding. Grain prices moved lower over the reporting period and farmers were managing costs in light of lower expected revenues.

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