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Dallas Beige Book

September 7, 2016

Economic activity in the Eleventh District expanded slightly over the past six weeks. Manufacturing activity was flat to up, and demand for nonfinancial services increased. Overall retail sales declined slightly on net, although automobile sales remained strong. Real estate activity was flat to up in most markets. Loan demand remained soft. Demand for oilfield services remained depressed, but contacts expect conditions to improve through the end of the year and into 2017. Agricultural conditions were favorable, although crop prices remained low. Reports of employment changes were mixed and prices held steady. Outlooks were generally positive but cautious, with the upcoming presidential election driving some of the uncertainty. Several contacts said they believe the worst of the oil bust slump has passed, but that economic growth has not yet returned to normal levels.

Prices

Prices were fairly stable over the reporting period. Input costs were flat to up, with slightly more upward pressure than during the prior period, especially for construction materials. Selling prices were mostly flat. Auto dealers noted manufacturer incentives increased over the reporting period, pushing down the final price for consumers. Fuel and chemical prices in the Gulf Coast were flat to down over the past six weeks, as large inventories and relatively tepid demand growth abroad put downward pressure on prices despite some signs of domestic demand growth.

Employment and Wages

Employment reports varied across sectors. Manufacturing and energy services firms continued to trim payrolls. Retail employment was flat to down. Reports of hiring were scattered among service sector companies with staffing firms adding employees and hiring continuing among leisure and hospitality firms. Several contacts noted a tight labor market for health care professionals, and labor constraints in the construction sector were ongoing. Wage pressures were minimal.

Manufacturing

The manufacturing sector stabilized over the reporting period, with some sectors even noting a pickup in demand. Construction-related manufacturers continued to see steady demand, with strength in the Dallas-Fort Worth market but mixed signals in Houston. High-tech manufacturing demand picked up modestly, with strong growth in autos, growing interest in virtual reality hardware, and continued development of new display technology. Demand was also up slightly among food manufacturers.

Refinery utilization rates remained very healthy in spite of softening profit margins. Flooding in Louisiana was not expected to have a significant impact on refining or petrochemical output overall. Gulf Coast chemical production was largely unchanged and continued to face headwinds from a strong dollar and softening global demand.

Retail Sales

Retail sales demand weakened slightly over the reporting period, and Texas remained the worst performing market in the nation according to two national retailers. Inventories are down year-over-year, in line with contacts' targets. Outlooks were less optimistic than during the last reporting period, although some improvement is expected over the next six months.

One bright spot in the retail sector is that automobile sales remained at high levels. Demand held fairly steady this reporting period and was in line with year-ago levels, although some contacts noted weakness in the Houston auto market. Contacts were more uncertain in their outlooks this reporting period, mainly because of the presidential election and its impact on consumers and consumer confidence.

Nonfinancial Services

Demand for nonfinancial services expanded over the past six weeks. Staffing services firms said demand picked up, particularly in Dallas, and a slight uptick was seen in Houston as well. Leisure and hospitality contacts said demand was mixed. Restaurants saw continued growth overall, with some signs of recovery in oil and gas areas. Hotel demand softened toward the end of the summer season. The outlook for the leisure and hospitality industry was positive, with restaurants expecting moderate to strong sales growth to continue through the end of the year, while hotels were more mixed in their expectations.

Cargo volumes were generally down over the reporting period. Overall rail cargo dipped further, led by declines in petroleum shipments, although grain shipments posted another notable increase. Low fuel prices continued to impact sales in the public transportation industry, and a contact noted that the freight trucking industry was negatively impacted by the energy bust leading to excess trucks on the market.

Construction and Real Estate

Reports on home sales and buyer traffic were mixed over the reporting period. Overall, sales of low to mid-priced homes remained strong. Some contacts noted increased competition among builders of move-up product, while demand softened at higher price points. Home prices were elevated, although there were several reports of discounting in Houston. Outlooks were positive through yearend with the exception of Houston, where contacts expect continued weakness in sales and starts.

Apartment leasing activity and rent growth was solid in most major Texas metros. In Houston, however, rents were flat to down, and up to three months of free rent was being offered in some areas. Multifamily construction continued to be elevated in Dallas-Fort Worth but is tapering off in Houston. Some contacts noted general tightening in multifamily construction lending, while one noted strong investment sales in Dallas-Fort Worth.

Demand for office space was steady in Dallas-Fort Worth and rents continued to edge up, while contacts in Houston noted slow leasing activity and continued increases in sublease space--which is currently well above its historical average. Office rents were flat to down in Houston. Industrial leasing was mixed in Houston, while retail demand and construction remained active.

Financial Services

Loan demand remained soft, which was partly due to seasonal factors, according to some contacts. Residential real estate lending grew, and consumer auto loans continued to perform well. On the other hand, commercial real estate and C&I loan demand remained weak. Most contacts noted improved loan quality, although there was some concern associated with loans to oil and gas companies. Credit standards were unchanged since the last report, with requirements remaining tight for energy-related loans. Loan pricing was very competitive in order for lenders to attract qualified borrowers. Deposits were flat as interest rates on deposits remained unchanged. Although there was still much uncertainty, mainly because of the upcoming presidential elections, contacts indicated improvement in their outlooks compared with six weeks ago.

Energy

Demand for oilfield services remained depressed, even as drilling ticked up. At current pricing and demand, the financial positions of many firms remained distressed. Most contacts were optimistic for modestly improving conditions and activity through the end of the year and into 2017.

Agriculture

Strong crop production prospects materialized into above-average yields for several crops, with double-digit increases expected for the 2016 cotton, corn and soybean crops. This will help offset some of the negative impact of low crop prices for farmers. Livestock grazing conditions have been very good this year, which, coupled with low grain prices, has reduced feed costs. Dairy producers benefitted from a marked rally in dairy prices over the past six weeks.

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