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Eleventh District Beige Book

March 1, 2017

Economic activity in the Eleventh District expanded moderately over the past six weeks. Manufacturing demand strengthened, and activity among nonfinancial services firms increased. Retail sales generally rose, although there were some reports of weakness. Housing demand was solid, with gains in home sales. Loan demand increased, and the energy sector improved modestly. The agricultural sector improved thanks to favorable weather and rising crop and cattle prices. Employment and wages increased, as did prices. Outlooks generally improved.

Employment and Wages

Overall employment rose, with hiring relatively strong in manufacturing and relatively weak in retail. Energy contacts reported that layoffs were mostly done, and that there were even several signs of hiring activity ramping up. Reports of skilled labor shortages continued, particularly in manufacturing and construction, and restaurant contacts said hiring qualified people remains a huge problem. Upward wage pressures were similar to the last reporting period. One contact remarked that increases in health care costs are more than they can pass on to employees.


Input costs continued to rise during the reporting period, with relatively strong upward pressure in manufacturing raw materials prices. Selling prices generally rose, with more widespread inflation reported among manufacturers and retailers. Some services companies noted that input price increases remained difficult to pass along. Railroad contacts noted downward pressure on prices due to excess capacity. Oil prices held steady while natural gas prices drifted downward. Agricultural commodity prices generally increased.


The manufacturing sector expanded again over the past six weeks. Output growth remained a bit stronger for durable goods than nondurables, although weakness persisted in fabricated metals --a segment with strong ties to the energy industry. However, a few fabricated metals manufacturers indicated activity has begun to increase in 2017. Exports remained a source of weakness for firms that sell internationally, with the strong dollar and softness in Mexico's economy hurting sales. Overall, outlooks remained positive. A few manufacturing contacts said their customers held a "wait and see" approach and that there is considerable uncertainty, including over the potential impacts related to policy changes from the Trump Administration.

Gulf Coast refiners noted seasonally strong utilization rates, despite lower margins in January. The competitive advantage of domestic chemical manufacturers (who use natural gas instead of oil as an input) has increased in 2017 thanks to a larger spread between oil and natural gas prices. The outlook for chemical firms remained healthy because this feedstock cost advantage is expected to persist. Refinery business is not expected to fare as well in 2017 as in 2016, as large inventories and expectations of moderate demand growth will keep margins modest.

Retail Sales

Retail demand continued to rise during the reporting period, although at a slightly slower pace than the prior period. One clothing retailer said sales in border cities and energy-related areas remained sluggish. Auto sales declined, with one auto dealer noting that the January seasonal decline was greater than normal. Overall, outlooks among retailers remained mostly optimistic.

Nonfinancial Services

Demand for nonfinancial services generally continued to increase over the past six weeks, with numerous reports of rising business activity. Most staffing services firms saw a pickup in demand. Staffing demand remained particularly strong in Dallas, with a surge in information technology, and rose slightly in Houston, including in the oil and gas sector. Professional and technical services firms noted increased revenues, while several reports from leisure and hospitality firms cited declines. Transportation services firms noted mixed movements in cargo volumes. Overall, most services firms noted improved outlooks. However, several expressed concern about uncertainty surrounding the new administration's potential policy changes and the resulting impact of those changes.

Construction and Real Estate

Home sales rose during the reporting period, with contacts noting a good start to 2017. Lot prices continued to escalate in DFW, were steady to up in Austin, and flat to down in Houston. Home prices remained elevated, although some discounting was noted in Houston, and contacts there said it was becoming difficult to pass through further increases. Outlooks were positive, but contacts expressed some concern about downward pressure on builders' margins and the potential impact of rising mortgage rates.

Apartment demand stayed solid, and occupancy rates generally remained high. In Houston, despite better-than-expected demand overall, occupancy dipped and rent concessions continued to be offered. This was particularly the case for class A product due to a surplus of new deliveries and completions. Rents rose further in most major metros, but contacts expect rent growth to moderate this year. Austin and DFW office markets remained strong, while continued weakness was noted in Houston. Industrial availability was tight in most major metros.

Financial Services

Loan demand increased over the past six weeks. Most respondents noted increased total loan balances, paralleled by improvement in general business activity. Commercial real estate and mortgage loans were among the better performing categories over the reporting period, and consumer loan demand ticked up. Lenders involved in auto loans noted that delinquency rates continued to rise. Contacts reported higher interest rates charged on loans as well as higher interest rates paid on deposits. Respondents expressed optimism about loan demand and general business activity over the next six months.


Demand for oilfield services increased in the Permian Basin, and the district rig count increased. Outlooks for 2017 were more positive than in the last reporting period, but remain slightly guarded. Contacts were unanimously negative in their expectations about the impact of the proposed border adjustment tax on their firms. Regarding price risks for the year, firms noted a downward bias, with inventories keeping a lid on oil prices at around $60 per barrel and lingering uncertainty around OPEC's ability to achieve its targeted production cuts for the first half of 2017.


Moisture levels remained favorable across the district. The wheat crop was in great shape, and row crop producers began field preparation in many areas and even started planting in some of the southern parts of Texas. Cattle prices continued to rally, due in part to seasonality but also a combination of ample demand and a tighter supply of cattle ready for market. Contacts noted an increase in beef exports. Cotton exports have been trending up so far this quarter, thanks in part to the strong quality of the 2016 cotton crop. Cotton prices were relatively strong, and contacts expect a large increase in cotton acreage this year. Other crop prices trended up over the reporting period. Wheat prices still generally remained below breakeven prices, but corn and sorghum prices rose to a profitable level for many producers.

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