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Dallas Beige Book

January 13, 2016

The Eleventh District economy grew at a modest pace over the last six weeks. Most respondents in manufacturing reported that demand either held steady or increased. Demand for nonfinancial services was mixed. Auto sales held steady, while retail spending moderated. Housing demand softened due to seasonal factors, and apartment, office and industrial leasing activity generally remained solid, except for continued 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 held steady or declined over the reporting period. Transportation services firms, including airlines, noted flat to lower rates and fares partly due to excess capacity and low fuel costs. Slight downward pressure on prices was also noted by retailers and auto dealers. Leisure and hospitality contacts reported stable input costs, still, some respondents noted plans to increase prices early next year. Some manufacturers also said they planned to increase selling prices in 2016, while a few noted continued pressure to reduce prices.

The price of West Texas Intermediate and natural gas fell during the past six weeks, affirming pessimistic outlooks for 2016. Gasoline and on-highway diesel prices dipped as well.

Labor Market

Employment in most industries held steady or increased. Contacts reported hiring in professional and technical services, finance, airlines and leisure and hospitality. Several manufacturers also added to headcounts, including primary metals, machinery, transportation equipment and food producers. One auto dealer said they would like to hire more people but were having trouble finding applicants. The second round of layoffs in the energy sector continued, and headcount reductions were also noted by some staffing services firms and electronic equipment producers. A railroad furloughed some employees.

Wages were flat to up from six weeks ago. Some manufacturers increased wages to attract qualified candidates and reduce employee turnover. Reports of a shortage of truck drivers continued, but leisure and hospitality contacts noted that finding workers had become easier.

Manufacturing

Most manufacturers reported flat or increased demand over the last six weeks. Producers of construction materials said demand was up in Dallas-Fort Worth, San Antonio and Austin, but down significantly in Houston, where contacts said residential demand had remained stable but that both commercial and industrial demand fell off notably. The downturn in energy prices continued to negatively impact some fabricated metals manufacturers. A machine tool producer said demand from the energy sector was terrible but that demand from the aerospace and medical industries was OK. Demand for high-tech manufacturing was modest, with a low-growth environment expected in 2016. Several manufacturing contacts noted the strong dollar's negative impact on their export business.

Refinery utilization rates rose further from very high levels. Margins remained healthy thanks to persistently low domestic oil and natural gas prices, although many chemical segments were hurting because of the strong dollar. Expectations for 2016 remain positive for petroleum refiners and most chemical manufacturers.

Retail Sales

Retail sales generally softened this reporting period, although one retailer said overall sales growth held steady and Thanksgiving weekend sales were strong. Sources of weakness included unseasonably warm weather and the strong dollar, which continued to dampen tourist spending and sales along the border. Outlooks were generally cautiously optimistic.

Automobile sales held fairly steady at high levels in part due to attractive manufacturers' incentives. Inventories were reported to be in good shape, and outlooks for 2016 were positive.

Nonfinancial Services

Demand for nonfinancial services varied over the past six weeks. Reports among staffing services firms were mixed again. A contact noted that demand in Dallas was still strong but that there has been more downsizing in Houston, and another contact said there have been some layoffs at companies two to three degrees separated from the oil and gas sector. Demand for professional and technical services increased moderately in the last six weeks. Multiple law firms noted record revenues for 2015, with intellectual property and real estate largely driving the growth. Demand in leisure and hospitality grew at a good pace, with the large metro areas continuing to perform best.

Air, sea and rail cargo volumes fell since the last report. Reports from trucking firms were mixed. Strength was noted in auto cargo shipments and in demand along the U.S.-Mexico border but demand from interior areas of Texas was weak. Courier cargo volumes increased during the reporting period, driven by growth in retail (particularly e-commerce) and nondurable wholesale (particularly apparel). Airlines reported a decline in passenger demand; however, outlooks were positive, with contacts expecting a pickup in both domestic and transatlantic demand.

Construction and Real Estate

Housing demand softened during the reporting period. Contacts continued to report seasonally slow buyer traffic and home sales; however, respondents in Houston cited the sluggish economy as a factor affecting sales as well. Dallas-Fort Worth area contacts noted push back from buyers on pricing, while a respondent in Houston reported price concessions on new homes. Builders' appetite for land has declined, but a few builders were building up their inventory of speculative homes. Apartment demand remained strong. Occupancy rates, although still high, dipped slightly, partly due to the large number of deliveries in the fourth quarter. Outlooks were fairly positive, with the exception of further weakening in Houston.

Demand for office space was strong in Austin and Dallas-Fort Worth, but continued to soften in Houston. Industrial leasing mostly remained active and vacancies were tight. Contacts noted high levels of industrial construction in Dallas-Fort Worth.

Financial Services

Loan demand grew at a slighter softer pace over the last six weeks. Lending to medium-sized businesses fell, likely due to seasonal factors. Strength in the auto market led to a robust increase in consumer auto loans and business loans to auto dealers. Construction lending weakened in Houston and San Antonio while holding steady in Dallas and Austin. Overall, business loans to developers increased according to one contact. Contacts noted increasing delinquencies in loans to oil and gas companies. Consumer credit card delinquencies also ticked upward, due in part to the seasonal increase in shopping. Economic outlooks deteriorated slightly as contacts anticipate low oil prices for the foreseeable future. Broader uncertainty surrounding regulation and global economic developments have also tapered outlooks for 2016.

Energy

Demand for oilfield services remained depressed as drilling declined in the Permian Basin and Eagle Ford Shale. Cost cutting continued through reductions in employment and capital spending. At recent low prices and demand, the financial position of many firms continued to deteriorate, particularly smaller firms. Outlooks were negative for 2016, and many contacts were concerned that there will be more defaults, bankruptcies, mergers and acquisitions in early 2016.

Agriculture

The district continued to receive ample rainfall, keeping drought conditions at bay and providing good soil moisture going into the spring planting season. 2015 crop production was above the five-year averages for most crops. However, crop prices are generally low, even sub-profitable for some producers, and much of the cotton crop was discounted further because of damage from too much rain. The low prices have led to some financial stress among agricultural producers. Cattle prices are well below year-ago levels but are still quite strong historically.

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