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Eleventh District Beige Book

January 18, 2017

Economic activity in the Eleventh District expanded moderately over the past six weeks. Manufacturing activity increased, and demand for nonfinancial services strengthened. Retail and automobile sales rose, although there were some reports of weakness. Housing demand grew and commercial leasing activity expanded in most markets. Loan demand was stable, and the energy sector saw further improvement. Agricultural producers faced mixed conditions, as record grain yields pressured prices, despite firm demand. Prices, employment and wages increased. Outlooks generally improved.

Employment and Wages

Overall employment rose, although hiring in manufacturing remained weak and there were reports of layoffs in health care. Some energy service firms reported higher employment levels and a recruiter for oilfield services firms said they had some orders for hiring and training new employees for

2017. A retailer said they will likely layoff some employees in 2017 if soft sales persist.  Reports of skilled labor shortages continued, particularly in construction. Upward wage pressures were similar to the last reporting period.

Prices

Input costs and selling prices rose during the reporting period. Staffing firms said pricing was flat, although one firm said they were renegotiating certain contracts at lower rates. Air fares edged up, while downward pressure on rail shipping rates was noted. Oilfield service firms reported an increase in prices, reflecting a pickup in demand for their services. Oil and natural gas prices rose, as did retail gasoline and diesel prices. Cotton and grain prices remained depressed. Cattle prices rebounded slightly and dairy prices generally increased but remained below profitable levels for smaller producers.

Manufacturing

The manufacturing sector expanded during the reporting period. Output rose for durables, although continued weakness was seen in fabricated metals manufacturing. Demand for construction materials was stable, and a brick manufacturer said that year-over-year demand was flat in Dallas, but down in Houston and Austin and up in San Antonio. Nondurable manufacturing production was flat to down, but food manufacturers noted increases. Outlooks remained positive, although a few contacts cited the strong dollar as a headwind for exports.

Gulf Coast refiners noted seasonally strong utilization rates, and said that large inventories and modest growth in demand will likely pressure margins this year. Chemical manufacturers noted a positive outlook for 2017, as they expect to receive better margins due to the wider spread between oil and natural gas prices--domestically, chemicals are produced with natural gas and have a cost advantage over oil-based production in other parts of the world.

Retail Sales

Retail demand rose during the reporting period, although one respondent said that the holiday season was very competitive. Contacts cited sluggish sales in border cities and energy-related areas. Still, outlooks were mostly optimistic. Automobile sales increased modestly on net, although there were reports of softness due to energy-related weakness.

Nonfinancial Services

Demand for nonfinancial services generally increased over the past six weeks at a slightly faster pace than in the prior period. Most staffing services firms saw a pickup in demand. Orders for temporary and contract workers remained solid, while demand for direct hires was mixed. Professional and technical services firms noted mixed activity, although revenues increased on net. Reports from food service firms varied as well, with some contacts noting continued growth, while others cited a decline in activity. Airlines saw an increase in passenger demand, which was driven by continued strength in domestic travel and a slight uptick in travel to South America. Cargo volumes were stable to up over the reporting period. Rail cargo increased, led by strong gains in grain shipments, although petroleum and coal shipments continued to decline. Seaport cargo volumes rose in large part due to strength in container traffic, while air shipments dipped to a slower pace than earlier in the year. Most services firms noted improved outlooks, although some expressed concern about the uncertainty surrounding the incoming administration.

Construction and Real Estate

Growth in home sales picked up during the reporting period, although respondents noted continued softness at the higher end. Several contacts attributed the increase to a post-election surge and higher mortgage rates. There were reports of pushback from builders on lot pricing. Home prices were flat to up slightly, and some contacts said builders were beginning to focus on bringing more affordable product to the market.

The DFW apartment market continued to lead other major Texas metros, with nearly full occupancy and strong rent gains, despite large deliveries. Demand in Houston was better than expected noted one contact, although it has been unable to keep up with supply, resulting in further declines in rents and occupancy rates. Rent growth slowed markedly in Austin and occupancy dipped, while rents and occupancy rose in San Antonio. Contacts noted that financing for new multifamily properties has become more difficult to obtain.

Office leasing demand remained solid in DFW, particularly for new product or recently built space. Rents ticked up, despite elevated construction. Leasing activity remained sluggish in Houston, but office sublease inventory fell after growing rapidly during the past two years. Industrial demand was solid in DFW, but moderated in Houston.

Financial Services

Loan demand was stable over the past six weeks, with most contacts reporting increases in total loan balances. Real estate and auto loan categories continued to perform well; however, demand for commercial and industrial loans was soft. Some contacts cited slight increases in interest rates on loans following the December federal funds rate hike. Two contacts noted a dip in non-interest income, driven in part by the poor performance of oil and gas firms and fewer mortgage refinancings because of higher rates. Credit quality remained solid and most respondents cited an uptick in deposit volumes. Outlooks were mostly optimistic, mainly due to elevated hopes for regulatory and tax relief following the presidential elections.

Energy

Drilling activity and demand for oilfield services improved modestly over the reporting period, with the increase largely driven by a pickup in Permian Basin activity. Outlooks were more optimistic than earlier in the year, although several contacts were skeptical about the implementation of the recent OPEC production cuts. Firms expect oil prices to be higher a year from now, and anticipate steady increases in activity over that period.

Agriculture

Record grain yields in 2016 have created burdensomely high stock levels, despite firm demand, keeping prices below the cost of production for most producers. Very strong cotton yields in West Texas led to another upward revision of Texas (and U.S.) cotton production, putting further downward pressure on prices which were already near breakeven or sub-profitable levels. Still, cotton prices are relatively better than feed grain or wheat prices, and contacts expect an increase in cotton acreage in 2017. Beef exports have increased, and low feed costs are helping producers' bottom lines.

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