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Dallas Beige Book

October 14, 2015

The Eleventh District economy grew at a moderate pace over the past six weeks. Manufacturing demand increased, and retail and auto sales grew. Demand for nonfinancial services held steady or improved, except for some transportation services. Real estate activity remained solid overall, and loan demand rose steadily. Demand for oil field services was still depressed, and lower oil prices dampened outlooks. Price pressures remained subdued and employment held steady or increased.

Prices

Most input costs and selling prices were generally stable over the reporting period. Transportation services firms and airlines continued to note lower fuel prices, and primary metals manufacturers said their raw materials prices were low, with one contact noting further softening. Selling prices were mostly unchanged, although a food manufacturer said prices were slightly higher and expects an increase going forward to help recoup past commodity cost increases.

Labor Market

Employment in most industries held steady or increased. Contacts reported increased hiring in staffing services, professional and technical services, finance, transportation services, and leisure and hospitality. Several manufacturers also added to headcounts, including metals, machinery, and transportation equipment producers. Most retail contacts expect to hire roughly the same number of temporary workers for the holiday season as they did last year. Employment was flat to down in high-tech manufacturing, and the second round of layoffs in the energy sector was still underway.

Wages were mostly flat to up from six weeks ago. Numerous contacts continued to note difficulty finding or retaining workers, skilled and unskilled alike. Staffing services firms said the cost of recruiting was on the rise because of the tight labor market.

Manufacturing

Most manufacturers reported increased demand over the last six weeks. In construction-related manufacturing, cement producers were working through backlogs and a brick producer noted continued strength in the Dallas-Fort Worth area but a decline in Houston due to low oil prices. Demand for primary and fabricated metals, machinery, and food products increased, according to contacts. There were a couple mentions of depressed demand in energy-related manufacturing work. An auto manufacturer said demand was up, partly due to the low price of fuel, and that the market has shifted from cars to trucks, SUVs, and minivans. The contact noted inventories were low, as they were outselling what they could produce.

Demand for high-tech manufacturing picked up slightly, with some of the weakness in the early part of the third quarter subsiding and demand for memory products picking up. A contact noted that stagnant growth in personal computers and expected slower growth in smartphone demand will put downward pressure on manufacturers. Another high-tech contact cut capital expenditure plans for next year in response to sluggish growth. Overall, these contacts expect mild growth for the rest of this year and into 2016, and one mentioned that global economic volatility and weakness in China pose a risk to growth next year.

Refinery utilization rates held strong, and margins remained healthy thanks to persistently low domestic energy prices. Exports of petroleum products have been hampered slightly by a strong dollar, but the cheaper domestic oil prices remained the most significant factor affecting exports. Integrated petrochemicals producers were doing well, although many chemicals products were hampered by the strong dollar and lower oil prices. Expectations for the rest of 2015 remained positive.

Retail Sales

Retail sales grew over the reporting period. More than half of contacts said sales growth was either at the same pace or slightly faster than in the prior reporting period. Contacts noted that the continued strength of the dollar remained a headwind to sales, as tourism spending is down and Mexican nationals were spending less in border cities. Overall, the Texas retail sector was reported as performing in line with the national average.

Automobile sales growth resumed over the past six weeks and was characterized by contacts as average. Sales were up strongly from a year ago. Inventories were mostly in good shape, although there were supply issues for some brands. Outlooks were mostly positive, with retailers expecting flat or stronger growth in the fourth quarter and auto dealers anticipating the normal seasonal strength at yearend.

Nonfinancial Services
Most nonfinancial services firms reported demand was flat or up from six weeks ago. Demand reports among staffing services ranged from poor to very strong. One contact mentioned that logistics demand was booming in the Dallas-Fort Worth area, and another mentioned that healthcare staffing was up. Demand for professional and technical services increased moderately over the reporting period. Accounting services demand remained robust, although one contact noted a slower pipeline of construction-related work. There was little evidence of effects from lower oil prices on professional services, and contacts thought the potential for bankruptcies and mergers might even increase demand in the medium term. Contacts in the restaurant and food services industry said demand grew at a moderate pace. One restaurant contact noted that sales in oil and gas areas were still growing softly but sales in larger metros were continuing to outperform expectations.

Rail cargo volumes were down again, with continued steep declines in shipments of petroleum products and nonmetallic metals (which includes sand used in drilling). Motor vehicle shipments remained a bright spot, with volumes up markedly. Air cargo, courier, and container volumes decreased over the reporting period. A contact noted steel shipments were down notably, largely due to projects in the oil and gas industry being halted. In contrast, trucking volumes rose, and one contact added capacity. Airlines reported no change in demand over the past six weeks. The domestic market continued to be the strongest, and demand for both leisure and corporate travel was equally strong. Overall, transportation services contacts stated that their outlooks were not as strong as they were a year ago.

Construction and Real Estate

Single-family housing activity generally remained strong. Overall, both new and existing-home sales increased, and demand was strongest for low- to mid-priced homes. Contacts in Houston noted slower buyer traffic and weakness in sales of higher-priced new homes. Contacts said builders were still working through their backlogs, and new-home construction activity continued to be restrained by labor shortages. Conditions in the multifamily market mostly remained solid, but one contact expects weakness in Houston’s high-end apartment market in the medium term as numerous new units are delivered. Outlooks for the housing sector were generally positive through year end.

Demand for office space remained solid in Dallas-Fort Worth, while contacts in Houston noted rent concessions and further increases in sublease space, particularly for class A properties. Industrial leasing and construction remained active, characterized by single-digit vacancy rates in both metro areas. Financing for construction of new office and multifamily space in Houston remained extremely limited.

Financial Services

Loan demand grew at a steady pace over the past six weeks. Contacts noted growth in mortgage lending and stronger demand for commercial real estate loans, particularly in Austin. Consumer lending continued to grow as demand for auto lending and credit cards increased at a robust pace. Loan standards were largely unchanged, although contacts noted the potential for tightening in the near-term in response to weakness in the energy sector. Loan quality decreased marginally as some energy-related services firms have either shut down or decreased their lines of credit. One contact also noted increasing loan loss provisions due to weakness in the energy sector. Interest rates on loans remained historically low. Bank deposits are at high levels and grew slightly, although renewals of longer-term deposit products such as certificates of deposit continued to decrease. Contacts cited recent monetary policy actions, financial market turbulence, and low oil prices as factors that have increased uncertainty.

Energy

Demand for oilfield services remained depressed as drilling activity declined. Firms were considering further cuts to 2016 capital expenditure plans, but not as large as the cuts made earlier in the year. At current pricing and demand, the financial positions of many firms continue to deteriorate, particularly smaller firms. Outlooks remain negative, with contacts concerned that the fourth quarter will bring a substantial increase in defaults, bankruptcies, mergers, and acquisitions.

Agriculture

Drought conditions worsened in East Texas and northern Louisiana over the reporting period. Texas wheat production was average this year, and wheat prices continued to slide, largely because of weak global demand. While the El Nino weather pattern that is expected this winter would be good for 2016 wheat crop production, prices are below breakeven for producers. The latest estimates for Texas cotton production came in lower than expected due to weak yields. Cotton export sales were weak, with demand from China--a major importer of Texas cotton--down year over year. Cattle prices dropped sharply over the last six weeks, causing Texas feedlots to lose money.

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