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Dallas Beige Book

June 1, 2016

Economic activity in the Eleventh District rose marginally over the past six weeks. Manufacturing activity ticked up and demand for nonfinancial services increased. Retail sales were mixed, with automobile sales remaining strong. Real estate activity continued to expand in most markets, while the energy sector contracted further. Loan demand growth slowed and agricultural conditions improved. Reports of employment changes and price pressures were mixed. Outlooks were generally positive but cautious.

Prices

Price pressures were mixed over the reporting period. Input costs were flat to up, with some contacts noting sharp increases in steel prices. Selling prices were mostly flat to down in the manufacturing sector, although a few manufacturers reported modest increases. Auto dealers said pricing was competitive and their margins were being squeezed. Excess capacity in the rail, trucking and airline industries was exerting downward pressure on fees and prices, while professional and technical services firms reported higher prices.

Oil prices rose during the reporting period pushing up fuel and chemical prices and giving many contacts greater confidence that the market may have found a bottom. Natural gas prices were essentially flat.

Labor Market

Employment reports varied across sectors. Hiring in manufacturing was mostly limited to replacing departing workers, while energy service firms continued to trim payrolls. Retail employment was flat, and one contact said they were cutting hours of store associates because of weak sales. There were reports of hiring in the service sector, with accounting firms noting ongoing labor shortages, and some leisure and hospitality firms planning to hire more seasonal workers than previously expected. Continued labor shortages for certain construction trades were noted as well.

Wage pressures were minimal. Energy service firms said compensation was steady to down for staff that have been retained. There were some reports of continued upward wage pressure for certain construction trades. While some staffing firms reported that clients were seeking low wages, they noted that candidates were not accepting the low offers.

Manufacturing

The manufacturing sector grew slightly over the reporting period following weakness earlier in the year, but outlooks remained weak. Stable to slightly slower demand growth was reported in high-tech manufacturing, where contacts cited weakness in consumer electronics but strength in industrial equipment and auto-related electronics. Among construction-related manufacturers, demand was mixed over the reporting period and slightly down overall, year over year. Those noting weakness attributed it to wet weather and declines in construction activity in Houston. Fabricated metals and transportation equipment manufacturers saw an increase in new orders, but some cited continued weakness in business tied to the energy sector. Primary metals producers said demand was flat to down. Declines in demand persisted in machinery manufacturing, particularly among those tied to the energy sector.

Refinery utilization rates and margins remained healthy, and refiners anticipate 2016 to be a good year but not as good as 2015. Gulf Coast chemical producers said margins were higher compared with the first quarter.

Retail Sales

Retail sales rose in April but more recent reports were less positive. Department store sales continued to decline on a year-over-year basis, and non-department store retailers noted slowing sales growth. Contacts attributed this to continued weakness in energy-dependent regions, declines in spending by Mexican nationals along the border and sluggish apparel sales. Sales of home goods, housewares, footwear and cosmetics were strong. Overall inventories were in good shape. Outlooks for 2016 sales were revised downward.

Automobile sales held fairly steady at very high levels and were up slightly from year-ago levels. However, a few contacts noted that the contraction in the energy sector was affecting sales. Trucks and SUVs were outselling cars. Inventories were generally at desired levels, although one dealer mentioned they were a little short on trucks. Contacts expect good sales volumes in the upcoming quarter but for margins to remain under pressure. The outlook is for strong sales in 2016, down very slightly from record highs reached in 2015.

Nonfinancial Services

Overall demand for nonfinancial services continued to expand over the past six weeks. Staffing services firms said demand remained strong in the Dallas area but weakened further in Houston. Overall, orders from the accounting, finance and healthcare sectors were solid. There were reports of increased demand for contract workers, which one firm attributed to clients being very selective in hiring permanent workers. Demand for professional and technical services increased. Consulting and legal firms said there was a lot of corporate restructuring work materializing in Houston, and an accounting firm reported solid demand, aside from a drop off in activity from energy-related industries. Leisure and hospitality contacts reported continued growth in demand in most major markets, but noted temporary dips in activity due to severe weather in some areas. Leisure and hospitality contacts were cautiously optimistic, with demand growth this summer expected to exceed last year's level.

Cargo volumes were mixed over the reporting period. Small parcel shipments rose, led by strength in e-commerce shipping, while there were broad-based declines in truck and rail cargo. Air and seaport cargo volumes were stable, as was airline passenger demand.

Construction and Real Estate

Home sales rose during the reporting period. New home sales continued to be characterized as good in Austin and Dallas-Fort Worth, and steady to down in Houston. Sales of entry-level and first-move-up homes were strong in most markets. Home prices were flat to slightly up, although there were reports of incentives and discounts being offered in Houston. Single-family housing starts rose markedly in Austin but fell in Houston in the first quarter, according to contacts. Apartment demand remained solid except for continued weakness in Houston, where rent concessions were being offered especially in submarkets with new Class A product in lease-up phase. Multifamily construction remained elevated but starts have slowed, particularly in Houston. Outlooks for the residential sector were positive except for Houston, where contacts expect further weakness this year.

Demand for office space was healthy in Austin and Dallas-Fort Worth, but deteriorated in Houston where sublease space continued to rise, putting pressure on office rents. Industrial leasing was generally active and vacancies were tight. In Houston, however, the picture was mixed as the market benefitted from ongoing petrochemical expansions and solid demand from retailers and third party logistics firms, but experienced an increase in industrial sublease space in the first quarter partly due to weakness in oil and gas-related manufacturing.

Financial Services

Loan growth slowed over the past six weeks. Demand for business lending softened, particularly for commercial and industrial loans, and reports of weaker commercial real estate demand were concentrated largely in Houston. Consumer loan demand held steady. Auto loans expanded strongly, and lines of credit continued to grow, especially in North Texas. Residential real estate loan growth was mixed, again reflecting weakness in Houston and continued growth in Dallas and Austin. Credit standards related to energy loans were very tight. One contact noted capping the supply of loans secured by multifamily residential projects. Deposit growth was mixed, and net interest margins remained narrow. Outlooks were largely pessimistic, especially among banks focused on business lending.

Energy

Demand for oilfield services remained depressed. Drilling continued to decline, with losses concentrated in oil-directed rigs. The financial positions of many firms, particularly smaller ones, remained weak. Some service firms were purchasing drilling or completion equipment at heavily discounted prices. Confidence continued to build that oil prices have found a bottom; however, firms want prices to remain at these levels for a while longer before making any changes to existing business plans. Outlooks remained somber for 2016, with little hope for growth before 2017.

Agriculture

Favorable weather and good soil moisture improved production prospects for 2016 crops. Contacts noted that above-average yields, if materialized, would help offset some of the negative impact of low crop prices on farm income. Cattle prices declined sharply in April, partly a result of higher beef production, but recovered some of the loss in early May as retail beef demand increased in anticipation of the Memorial Day holiday. Milk prices plummeted from already-low levels over the past six weeks, putting further pressure on dairies' profit margins.

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