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Dallas Beige Book

April 13, 2016

Economic activity in the Eleventh District was flat to up slightly over the past six weeks. Manufacturing held fairly steady on net while demand for nonfinancial services increased modestly. Retail sales edged down except for automobiles, where sales pushed to even stronger levels. Real estate activity continued to expand in most markets, while the energy sector contracted further. Reports of price pressures and employment trends were varied. Outlooks were still somewhat optimistic, although generally cautious, with oil price volatility and the presidential election driving some of the uncertainty.

Prices

Price pressures over the reporting period were mixed, with slight upward pressure on prices and fees in the service sector but continued deflationary pressure on prices for manufacturing output. Contacts in the airline industry said ticket prices increased marginally as the industry started to adjust to the overcapacity seen last year. Retail prices returned to normal after being held down by promotions during the last reporting period. Among manufacturers, selling prices were flat to down.

Oil prices rose over the past six weeks, leading many contacts to suggest the market may have found a bottom. Gasoline prices moved up but remained soft, and several contacts noted that low gasoline and natural gas prices were helping keep input costs in check.

Labor Market

Employment reports were varied. Scattered reports of hiring were noted throughout the service sector, especially among hospitality firms, and among food producers and a few other manufacturers. Retail employment was flat to down slightly, and several transportation services firms continued to trim payrolls. Layoffs were noted among several manufacturers, particularly of energy-related goods such as fabricated metals. Some energy contacts noted they were loath to cut more jobs and were instead completely eliminating overtime or no longer matching 401K contributions, but many energy firms said they may still have to trim headcounts further this year.

Wage pressure remained subdued, although a few contacts noted concerns about minimum wage legislation and the impact from companies like Wal-Mart and McDonald's raising their minimum wages. Respondents continued to report shortages of accountants and high-skilled high-tech workers, while labor shortages in the construction sector were not as acute as before.

Manufacturing

The manufacturing sector stabilized somewhat over the reporting period after weakness earlier in the year. Stronger demand was reported by food and transportation manufacturers, as well as in high-tech manufacturing, where contacts cited auto-related electronics as a continued source of strength. Construction-related manufacturers said demand was strong in Dallas but weak in West Texas and Houston. For example, a cement contact expects commercial and industrial backlogs in Houston to dry up toward the end of the year. Among fabricated metals and machinery manufactures--whose customer base is often more concentrated in the energy sector than other manufacturing--declines in demand continued but at a slower rate. There were several reports of these firms diversifying to aerospace, construction or other markets to boost business.

Refinery utilization rates remained healthy despite seasonal maintenance. Refiners are projecting 2016 to be a good year but not as good as 2015. Gulf Coast chemical producers were still conservative regarding budgets and capital spending in 2016, but some sectors were modestly more optimistic than they were six weeks ago. Most notably, PVC producers became more bullish regarding U.S. construction demand.

Overall, outlooks in the manufacturing sector remained cautious. Some contacts said the uptick in oil prices provided some relief to customer sentiment while others continued to voice concern about low oil prices and the weakness in the energy sector rippling through to their customers. The strong dollar and weak global growth were also mentioned as headwinds.

Retail Sales

Retail sales worsened slightly since the previous report. Contacts attributed this to continued weakness in energy-heavy areas, the strength of the dollar dampening sales to Mexican nationals along the border, and unseasonably warm weather hurting winter apparel sales. Texas continued to perform worse than the national average. Retailers expect a slight pickup in the second half of the year but think 2016 sales overall will come in below 2015.

Automobile sales remained strong and were up slightly from the last reporting period. Year-over-year sales in February were up considerably because the number of selling days last year was greatly reduced by poor weather and ice storms. Inventories were reported to be high, with mixed views on the desirability of those levels. The outlook is for 2016 sales growth to be as strong as it was in 2015; however, margins will be more challenged this year.

Nonfinancial Services

Overall demand for nonfinancial services increased slightly over the past six weeks. Staffing services firms said the Dallas area was still very strong while demand continued to be flat in Fort Worth and declining in Houston. Demand for professional and technical services increased, although growth in the accounting sector was restrained by a lack of available workers. Legal firms noted that bankruptcy and corporate restructuring work began to materialize among oil and gas companies. An application developer reported that slowing demand from oil and gas clients was offset by growth in the healthcare, retail and food industries.

Most transportation services contacts reported that cargo volumes declined. Truck and air cargo was down and rail cargo was down for most commodities except for motor vehicles. One contact noted that steel imports were down dramatically from a year ago, largely attributable to the slowdown in oil exploration. Airlines said demand was stable over the reporting period and leisure and hospitality contacts reported that activity remained strong in all major markets, with robust growth expected to continue through the summer.

Construction and Real Estate

Home sales grew during the reporting period. New home sales were characterized as solid in Austin, good but not as great as last spring in Dallas, and steady to down in Houston. Sales of entry-level and first-move-up homes remained solid. Apartment demand was strong except for a softening in leasing of Class A space in Houston, where up to 2 months of free rent was being offered on new 12-month leases. Multifamily construction remained elevated but permitting and starts have slowed in Houston. Outside Houston, outlooks for the housing sector were positive and home prices were generally flat at elevated levels. There were reports of home price concessions being offered in Houston, and contacts expect further weakness in the Houston apartment market.

Demand for office space was healthy in Austin and Dallas-Fort Worth, but continued to weaken in Houston. Industrial leasing remained active and vacancies were tight, although one contact noted slight energy-related softening in Houston. Industrial construction was elevated in Dallas-Fort Worth.

Financial Services

The majority of financial services contacts noted zero or slightly negative loan growth overall. Agriculture loan demand softened, largely due to lower crop and cattle prices. Residential mortgage growth slowed as banks began adjusting to new Consumer Financial Protection Bureau regulations that were put in force January 1st. Loans to small- and medium-sized businesses were down slightly, including loans to auto dealers, while steady growth was seen in consumer lending. Loan quality continued to deteriorate mildly due to stress in the energy sector, although delinquency rates remained at low levels. Scrutiny of energy lending has increased, mildly tightening credit availability. Deposit growth slowed over the reporting period, and interest rates, both on loans and deposits, remained low. Outlooks remained very cautious.

Energy

Demand for oilfield services remained depressed as drilling continued to decline. The financial positions of many firms continued to deteriorate despite slightly higher prices in March, particularly smaller firms. Further cuts to capital expenditures have become less likely, as sentiment grew that the energy sector may have found a bottom. Outlooks remained somber for 2016, with little hope for growth before 2017.

Agriculture

Row-crop farmers were busy preparing fields or planting, and the USDA Prospective Plantings report showed acreage increases in Texas for cotton, corn and soybeans this year versus 2015, and acreage declines for sorghum and wheat. Production prospects for 2016 crops are quite positive in light of healthy soil moisture and a favorable weather outlook. While crop prices generally increased slightly over the past six weeks, they remained low and contacts continued to mention stressful financial situations among many producers in the region. On the cattle side, prices increased over the reporting period, largely seasonally, and beef production was higher than a year ago.

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