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Dallas Beige Book

December 2, 2015

The Eleventh District economy grew at a modest pace over the past six weeks. Most respondents in manufacturing and services reported that demand either held steady or increased. Auto sales rose while reports on broader retail sales were mixed. A seasonal slowdown occurred in home buying, but broader real estate activity remained strong overall, except for some weakness in Houston. Energy activity was still depressed. Price pressures remained subdued and employment held steady or increased.

Prices

Most input costs and selling prices were generally stable over the reporting period. With respect to input prices, several contacts--grocery stores, restaurants and food manufacturers--noted lower prices for meats. Airlines continued to say that lower fuel prices helped the industry immensely, and machinery and primary metals manufacturers said the decline in steel and copper prices continued to boost margins. Selling prices were mostly unchanged, although some leisure and hospitality contacts noted higher prices and a freight trucking firm said they passed on fuel cost savings to customers.

Labor Market

Employment in most industries held steady or increased. Contacts reported hiring in staffing services, professional and technical services, airlines, and leisure and hospitality. Several manufacturers also added to headcounts, including fabricated metals, transportation equipment and food producers. Retailers said holiday hiring plans were in line with last year, and most said there hasn't been any difficulty hiring temporary workers. The second round of layoffs in the energy sector was still underway and has consisted of more white-collar jobs than the round of cuts earlier this year. One petrochemicals contact noted that some laid-off oilfield workers were showing up on the coast and getting hired in the downstream energy sector, mostly in construction-related jobs. New-home construction continued to be restrained by labor shortages, particularly in Dallas-Fort Worth, while contacts in Houston noted increased labor availability.

Wages were mostly flat to up from six weeks ago. Several contacts continued to note difficulty finding or retaining workers, particularly truck drivers, although a few said layoffs in the energy sector eased labor tightness in some pockets of the service sector. Hospitality contacts said expectations of a future minimum wage increase prompted increases in starting pay as a preemptive measure.

Manufacturing

Most manufacturers reported flat or increased demand over the last six weeks. Producers of construction materials like cement, brick and lumber said demand flattened due to a normal slowdown that occurs heading into the winter. Most contacts in construction materials and primary metals expect weaker demand through year end, in line with the usual seasonal pattern. A fabricated metals manufacturer involved in commercial and road construction had the best year since the recession, and a machinery manufacturer said that despite relatively flat demand, they were experiencing record profits and payouts to employees because of lower input prices. A machine tools manufacturer closely tied to the energy sector said demand was terrible, worse than in 2009, that auction houses were loaded with relatively new machinery from failed shops, and that sales of new tools are virtually nonexistent.

Demand for high-tech manufacturing picked up slightly, although concerns about weakness in the global economy continued to weigh on producers. Contacts noted persistent softness in some memory component manufacturing and consumer electronics. The overall outlook was slightly improved but contacts remained cautious, saying that they expected slight growth in 2016 but that uncertainty in international demand was a significant risk factor.

Refinery utilization rates were very high and rose further, and margins remained healthy thanks to persistently low domestic energy prices. Gulf Coast chemicals producers reported softer global demand and a strong dollar as sources of continued weakness in year-to-year comparisons. Firms remained optimistic for 2016, with U.S. production costs remaining globally competitive.

Retail Sales

Reports on retail sales were mixed this reporting period. Sources of weakness included wet weather and the strong dollar, which deterred tourism and sales along the border. One contact said that although they were experiencing overall growth, they were seeing negative impacts in smaller markets such as Midland-Odessa, which they have attributed to low oil prices.

Automobile sales were at very high levels and continued to grow. Contacts said the industry is performing strongly nationwide and one noted record sales. Contacts expect steady sales through year end. A couple of auto dealers remarked that the robust sales level seen in 2015 likely won't be exceeded next year, so sales may be flat or down slightly in 2016.

Nonfinancial Services

Most nonfinancial services firms reported demand was flat or up from six weeks ago. Reports among staffing services firms were mixed. Staffing demand from sectors such as logistics, healthcare, engineering, hospitality, and food service was strongest. One contact mentioned that there was more hesitation in the market and that demand had shifted back to temporary and contract workers and away from direct hires. Demand for professional and technical services increased moderately in the last six weeks. Law firms noted softer-than-expected growth, primarily due to less litigation work, but demand for intellectual property work strengthened, and mergers and acquisition activity remained elevated. Accounting demand continued to grow at a robust rate. Consulting work ticked upward, although international deals have been stagnant due to weakness abroad. Demand in leisure and hospitality grew at a good pace, with contacts reporting overall sales above expectations and particularly strong demand in Texas' large metro areas. Overall, outlooks were positive going in to 2016.

In transportation services, cargo volume remained soft due to the slowdown in energy-related cargo. Demand in the airline industry was flat overall, with continued strong domestic demand. The international outlook remained weak, but airlines were positive about the domestic market and noted that as long as fuel prices remain this low, they will continue to perform well.

Construction and Real Estate

Single-family housing activity decelerated over the reporting period. Contacts noted seasonally slow buyer traffic and new home sales, but respondents in Houston cited a sluggish economy as a factor affecting sales as well. Despite some slowing, sales of low- to mid-priced new homes remained strong. Builders continued to work through their backlogs, although the pipeline was thinning out in Houston due to softer demand. Apartment demand continued to run ahead of deliveries across the four major Texas metros, resulting in a slight uptick in occupancy in the third quarter. Rent growth generally remained solid and was the strongest in Dallas-Fort Worth, but it slowed in Houston. Multifamily construction remained elevated. Outlooks were mostly positive, with weakness expected in Houston.

Demand for office space was strong in Dallas-Fort Worth, with record net absorption so far this year. Activity in Houston held steady for class B and C office space but softened for class A space. Industrial leasing and construction remained active, although construction started to taper off in Houston.

Financial Services

Loan demand grew at a slighter softer pace over the last six weeks. Consumer lending remained strong with notable rises in auto loans and credit cards. Home equity loans also accelerated due to home price appreciation and the need for long-delayed home improvement projects. Lending to businesses, in contrast, has softened, but contacts believe this is likely due to seasonal factors. Contacts expect some tightening of loan standards in response to slowly declining loan quality among energy sector loans. Interest rates on deposits and loans remained historically low, although most contacts anticipate a slow rise in rates for 2016. Outlooks were largely uncertain, mostly due to the uncertainty of future oil prices, but also due to regulation and monetary policy.

Energy

Demand for oilfield services remained depressed as drilling activity declined in the Permian Basin and Eagle Ford Shale. Capacity utilization was at 50 percent, with some of the idle equipment being maintained and some mined for parts. One oil producer plans to maintain its current rig count if oil prices stay in the $40-$50 range but will enact further cuts if prices move lower. At current pricing and demand, the financial positions of many energy firms continued to deteriorate, particularly smaller firms.

Agriculture

Abundant rainfall over the reporting period alleviated drought conditions. Less than one percent of the district was in drought in mid-November, compared with more than a third at the end of September. The wet weather improved soil moisture for crops and replenished ponds for grazing cattle. That said, Texas is likely to have an average cotton production year rather than the bumper crop thought possible in early summer. Cotton yields were hindered by a hot and dry August and the quality was diminished by too much rain just before harvest. Domestic demand for grains and cattle remained solid but export demand was weak. Grain prices fell slightly and cattle prices declined but remained at high levels. Retail beef prices were down from a year ago.

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