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Eleventh District Beige Book

April 19, 2017

Summary of Economic Activity

Economic activity in the Eleventh District expanded moderately over the past six weeks, with a slight acceleration from the prior reporting period. Manufacturing output strengthened further, and activity among nonfinancial services firms increased. Retail sales rose at a somewhat faster clip, including a pickup in auto sales. Home sales rose during the reporting period, although apartment demand slowed slightly. Loan demand strengthened and the energy and agricultural sectors improved. Employment and wages increased moderately, as did prices. Outlooks generally improved, with most contacts expecting 2017 to be stronger than 2016.

Employment and Wages 

Overall employment rose moderately over the reporting period. Manufacturers have added to payrolls so far this year, in contrast with most of 2015 and 2016 when factory contacts noted employment declines on net. Hiring in the services sector continued, including slight job gains among retailers in March. In the energy sector, hiring among oilfield services firms picked up notably in the first quarter, while some exploration and production firms continued to note layoffs. Several contacts speculated that employment in the energy sector will not increase proportionately with increases in drilling activity because of improved production technology and efficiencies. Labor market tightness has appeared throughout the oil and gas supply chain, with several contacts specifically mentioning shortages of truck drivers, and nearly all sectors reported upward wage pressures. Some labor shortages were also noted by manufacturers and certain services contacts, including hospitality. Overall, upward wage pressures were similar to the last reporting period.

Prices

Prices generally increased over the reporting period. An exception was in retail where slight declines were seen, partly due to price cuts for new automobiles. Upward price pressures in manufacturing eased slightly, retreating to more normal levels after a few hot months. Construction contacts noted higher prices for lumber, concrete, plumbing and framing. Oilfield services firms increased prices over the past six weeks, with further increases expected as demand picks up.

Manufacturing 

Expansion in the manufacturing sector picked up pace somewhat over the past six weeks. Output growth remained slightly stronger for durable goods than nondurables, with a rebound seen in fabricated metals manufacturing. Exports remained a source of weakness for firms that sell internationally. Overall, outlooks stayed positive. A few manufacturing contacts noted considerable policy uncertainty, especially regarding any changes that would impact trade with Mexico.

Refinery utilization along the gulf coast was healthy. Large inventories of product and expectations for softer demand growth continue to put downward pressure on expectations for refinery margins. Chemical producers reported healthy domestic demand for a wide range of products and remain optimistic for strong margins this year. Comments on international chemical demand were mixed, but generally positive.

Retail Sales

Retail sales continued to rise during the reporting period, at a slightly faster pace than the prior period. Auto sales increased, although a contact noted that demand in Houston was weak. Other retail firms also noted slower sales in Houston relative to other Texas metros. Contacts again mentioned that the depreciation of the peso was harming overall retail sales along the border. Overall, outlooks among retailers remained fairly neutral, a deterioration from the optimism noted in the prior reporting period.

Nonfinancial Services

Demand for nonfinancial services generally continued to increase over the past six weeks, at roughly the same pace as seen in the prior reporting period. Professional and technical services firms noted particularly strong revenue gains, and leisure and hospitality contacts cited increased revenues in March after losses earlier this year. Transportation services firms also noted revenue gains, with rail contacts noting a strong increase in crushed stone, which is used for frac sand. Airlines said demand was stable over the past six weeks and up from a year ago, led by a stronger domestic market. Staffing services firms saw a pickup in demand, relative to the six weeks prior as well as the same time last year. Demand for placements remained particularly strong in Dallas, especially in relation to Houston, where contacts noted energy firms' recoveries stalled a bit recently with depressed oil prices. Overall, most services firms noted improved outlooks.

Construction and Real Estate

Home sales rose during the reporting period. Contacts noted the spring selling season was generally off to a good start, with year-to-date sales close to plan for several builders. However, buyers were price sensitive, and incentives were being offered in some markets, squeezing builders' margins. Housing affordability continued to be a concern. Outlooks were positive, and overall sentiment in Houston was better than this time last year.

Apartment leasing activity slowed and occupancy fell in the first quarter. Annual rent growth was solid in Dallas-Fort Worth but moderated in Austin. Rents were flat to down in Houston. Contacts generally expect slower rent growth this year.

Demand for office space was healthy in Dallas-Fort Worth, and office construction continued to be elevated there. In Houston, office demand was mostly weak and office construction tapered.

Financial Services

Loan demand increased over the past six weeks. Total loan volumes expanded, with lenders noting higher balances on commercial and industrial loans, as well as real estate (both commercial and residential) loans. However, contacts reported decreased volumes of consumer loans. Contacts indicated improved loan performance and tightened lending standards. More than half of lenders noted an increase in loan pricing over the past six weeks. Contacts also noted an increase in interest rates paid on deposits and rising deposit volumes. Outlooks were predominantly optimistic, with expectations for stronger loan demand and business activity six months from now.

Energy

Demand for oilfield services improved substantially in the district over the past six weeks. Oil and gas activity surged, with firms noting a pickup in the Eagle Ford Shale as well as the Permian Basin. Several contacts mentioned that the accelerating pace may not be sustainable, expecting rig count growth to moderate mid-year. Outlooks overall for 2017 were more positive than in the prior reporting period, especially among oilfield services firms, but most contacts noted concern over expected volatility.

Agriculture

Moisture levels remained favorable across the district, with ample rainfall received over the reporting period. The winter wheat crop was in good shape, and row crop planting continued. Cotton acreage is expected to be up sharply in 2017, driven by expectations of higher cotton prices this year. Grain prices remained weak and trended down over the past six weeks. The cattle industry benefitted from strong pasture conditions and rising cattle prices.

Find the full Beige Book report at www.federalreserve.gov/monetarypolicy/beige-book-default.htm