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Dallas Beige Book

November 30, 2016

Economic activity in the Eleventh District expanded modestly over the past six weeks. Manufacturing activity rose, and demand for nonfinancial services increased. Retail sales fell, and automobile sales softened. Real estate activity continued to expand in most markets. Loan demand was stable, and the energy sector saw slight improvement. Agricultural producers faced mixed conditions, as low commodity prices pressured farm revenues, despite higher crop yields and good pasture conditions. Upward price pressures remained limited. Employment increased and wage pressures were more widespread. Outlooks were mostly positive but cautious.

Prices

Prices rose slightly on net. There was continued upward pressure on input costs, while selling prices were mostly flat. Airlines noted stable to higher fares, while trucking and railroad contacts noted downward pressure on shipping rates. Food services firms said they plan to increase prices in the near term. Home prices and construction costs generally stayed elevated. Oil and natural gas prices fell toward the end of the reporting period, giving up all of their earlier gains. Fuel prices fell, as persistently high levels of inventory put downward pressure on refined product prices.

Employment and Wages

Employment levels held steady or increased at most responding firms. Some staffing firms cited a tight labor market, with many candidates receiving multiple job offers. Energy firms noted that layoffs were mostly done, however there is little hope for recovery in employment levels in 2017 if oil prices do not increase above $50. Construction labor shortages were easing in Austin and Houston, but remained acute for certain trades in Dallas-Fort Worth.

Reports of wage pressures were more widespread than the past reporting period, in part due to rising benefits costs and partly due to the new overtime regulation. Some firms stated that they will have to limit and/or cut hours of those eligible for overtime pay under the new rule.

Manufacturing

The manufacturing sector expanded at a slower pace than the previous reporting period. Output rose for durables, although continued weakness was seen in energy-related categories such as machinery and fabricated metals manufacturing. Demand for construction materials was flat to up slightly, and one contact noted that backlogs continued to decline in Houston but were steady in Dallas. Nondurable manufacturing production was flat. Outlooks remained positive, although some contacts continued to cite the strong dollar as a headwind for exports.

Refinery utilization rates were healthy and ticked up along the Gulf Coast. Chemical producers reported better-than-expected orders for November and December, although a strong dollar continued to dampen export demand. Refiners expect to end the year with slightly below-average margins, while chemical manufacturers noted a positive outlook for this year and next.

Retail Sales

Retail demand fell during the reporting period and outlooks were pessimistic. Contacts cited sluggish sales in border cities due to the strong value of the dollar. Continued weak activity in the oil patch and warm weather hurting winter apparel sales were also factors affecting demand. Automobile sales softened in part due to energy-related weakness, and contacts were rather pessimistic in their outlooks.

Nonfinancial Services

Demand for nonfinancial services generally increased. Staffing services firms said demand was flat to up, with activity in North Texas remaining strong. Staffing contacts noted strength in demand from the healthcare, logistics, distribution, manufacturing, and construction sectors, while oil- and gas-related activity remained tepid. Professional and technical services firms saw some softening in activity, although revenues increased on net. Reports from leisure and hospitality firms were mixed, with some contacts noting continued growth in the large metro areas, while others citing flat activity along the Texas-Mexico border. Airlines reported stable demand, with domestic travel remaining strong. Cargo volumes were mixed over the reporting period. Courier cargo volumes increased, driven by continued strength in retail shipping. Truck and seaport cargo volumes held steady, while rail shipments dipped in nearly every category. Services firms were generally optimistic in their outlooks, with some anticipating an increase in revenues next year.

Construction and Real Estate

Home sales rose over the reporting period. Sales of lower-priced homes remained solid, and contacts in Dallas-Fort Worth cited a pickup in demand at mid-price points. New home starts rose in Austin and Houston in the third quarter. Land prices remained elevated, although some contacts in Houston noted a decline in lot prices in selected submarkets.

Apartment occupancy remained fairly stable at high levels and rents rose in most major metros except in Houston, where persistent declines were noted. Contacts expect apartment construction and rent growth to moderate next year. Office leasing activity was mostly unchanged from the previous report, with continued strength in Dallas-Fort Worth and ongoing weakness in Houston.

Financial Services

Loan demand was stable to up slightly over the reporting period. Increases were reported for residential real estate, home equity, and automobile loans, while demand for C&I and interbank loans was somewhat sluggish. One contact reported increased competition for consumer lot loans (residential), which have been a solid source of income over the past few years. Respondents indicated stable loan quality, and cited improvements in the quality of energy related loans, likely due to the recent stabilization in the energy sector. Deposits grew at a steady pace, with some contacts noting higher-than- expected levels. Interest rate margins remained stable. Outlooks were marginally improved compared with the last reporting period.

Energy

Drilling activity and demand for oil field services improved slightly over the reporting period. The increase was largely driven by an uptick in activity in the Permian Basin, while activity in the Eagle Ford region remained subdued. One contact said that about half of the increase in the Permian Basin was driven by profits and the other half was due to maintenance of existing leases. Contacts reaffirmed that oil and gas activity will gradually pick up and 2017 will be a better year than 2016; however, these expectations have moderated in light of recent revisions to the global oil demand and supply outlooks.

Agriculture

Harvest season wrapped up for many crops, and the latest USDA estimates for Texas suggested 2016 production of cotton, corn, and soybeans was up from last year while sorghum production declined. With prices for these crops, in addition to wheat prices, remaining at mostly sub-profitable levels, there is continued worry about low producer revenue, loan repayment for the current year, and financing for the coming year. Livestock conditions remained positive across the District, with abundant forage due to good pasture conditions. Cattle prices continued to slide lower, which contacts attributed to recent financial losses at cattle feedlots and an increase in domestic beef production.

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