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Eleventh District Beige Book

July 12, 2017

Summary of Economic Activity

The Eleventh District economy continued to expand at a moderate pace over the past six weeks. Manufacturing output rose, and activity in nonfinancial services increased. Growth in retail sales slowed, while auto sales dipped. Housing demand grew, lending activity increased, and the energy sector saw continued improvement. Crop conditions were mostly favorable. Employment and wages rose, as did prices. Outlooks remained positive, although some contacts noted uncertainty regarding changes in trade and healthcare policy as well as tax reform.

Employment and Wages

Overall employment rose moderately, and wage pressures were similar to the last report. Manufacturers added to payrolls, with some noting that labor shortages were pushing up wages. Hiring in the services sector, including retail, continued. The construction labor market remained tight, particularly in Dallas-Fort Worth and Austin. Two staffing firms cited wage pressures across most skill levels, while two reported that rising wage pressures were limited to higher-skilled positions. Contacts noted labor market tightness throughout the oil and gas supply chain and continued to cite upward wage pressures particularly for experienced personnel and for certain skills sets.

Prices

Selling prices increased at a slightly slower pace than in the prior report. Some oilfield services firms noted a weaker outlook for margins as costs were rising at a faster pace than selling prices. Accommodation and food services contacts noted higher prices. Staffing firms saw stable billing rates, while airlines noted higher fees and ticket prices. Cotton prices slipped in June on rising expectations of strong cotton production this year. Retail gasoline and diesel prices fell over the reporting period following the decline in oil prices.

Manufacturing

Expansion in the manufacturing sector slowed over the past month. Among durables, output growth in primary metals and machinery manufacturing strengthened, but production was flat for fabricated metals and high-tech manufacturing. Food manufacturers reported an increase in demand. There were reports of strength in energy-related manufacturing activity, but exports remained a source of weakness for manufacturers who sell internationally. Overall, outlooks stayed positive. A couple of contacts said they were uncertain about how long the current strength in activity would last.

Refinery utilization rates along the Gulf Coast increased. Refiner margins in 2017 will likely be lower than previously expected, reflecting large product inventories and lower expectations of U.S. consumption growth. Chemical producers noted healthy global demand and good margins.

Retail Sales

Retail sales continued to rise, although at a slower pace than the prior period. Some contacts noted that in-store sales continued to be weak. There were a few reports of sales improving along the Texas-Mexico border and in energy-related regions. Auto sales fell during the reporting period. Auto lenders have tightened credit amid rising delinquencies. Outlooks among retailers generally improved compared with the prior report.

Nonfinancial Services

Demand for nonfinancial services expanded moderately over the past six weeks. Demand for staffing services generally increased, with all contacts noting higher year-over-year activity. Placements of health care professionals generally remained high. Contacts saw a pickup in orders for mining-related work in East Texas and cited broad-based demand for white-collar workers in Dallas-Fort Worth. A contact in Houston noted surprisingly strong demand for entry- to mid-level placements from oil and gas firms.

Professional and technical service firms saw revenue gains during the reporting period, with several firms noting a pickup in activity. Accommodation and food services contacts also noted slight increases in revenues, although there were some reports of persistent weakness in demand. Airlines said passenger demand held steady over the past six weeks. Domestic travel remained stable, while activity along transatlantic and South American routes increased.

Transportation and warehousing firms noted higher revenues and an increase in cargo volumes since the last report. Rail cargo rose, led by strong gains in shipments of fracking sand and grains, although shipments of petroleum products and motor vehicles continued to decline. Parcel shipments and seaport cargo increased, while air and trucking freight volumes were flat. Outlooks among nonfinancial services firms remained fairly optimistic, although some contacts expressed concern about economic and political uncertainty.

Construction and Real Estate

Homes sales continued to trend upward during the reporting period. Contacts in Austin, Dallas-Fort Worth and Houston noted that sales of low- to mid-priced homes mostly remained strong, however, sales at the higher-price points varied by submarket. Home prices were flat to up, and more builders were focusing on bringing moderately-priced products to the market.

Apartment demand improved and occupancy edged higher in the second quarter, following a generally slow first quarter. Leasing activity picked up in Houston where overall market conditions were beginning to stabilize, and landlords were able to reduce rent concessions on select floorplans. Rental rates rose, with Dallas-Fort Worth seeing the fastest growth. Outlooks were positive and contacts expected continued, gradual improvement in Houston's multifamily market. Transaction volume appeared to have slowed for multifamily properties as there was not much inventory on the market for sale.

Office demand in Dallas-Fort Worth remained solid and rent pressure persisted, although rental rates at the very high end have been relatively flat. One contact expressed some concern about the elevated level of office construction in the metroplex.

Financial Services

Loan demand increased over the past six weeks, although at a slightly slower pace than in the previous reporting period. Growth in commercial real estate and commercial and industrial loan volumes slowed. Residential real estate loan balances expanded at a faster rate than in the previous reporting cycle, while consumer lending declined slightly. Deposit volumes expanded, and lenders cited higher net interest margins as well as higher rates on loans. Contacts remained largely optimistic regarding future business activity and loan demand; however, several continued to express concern about the regulatory environment.

Energy

Demand for oilfield services continued to improve, and oilfield services firms noted increased utilization of their equipment. Drilling activity rose further, and exploration and production firms reported an increase in oil and gas production. Several contacts said that the pace of increase in the rig count may not be sustainable and that they expect it to taper off or even plateau past mid-2017. Outlooks remained positive, although contacts were less optimistic compared with the previous report.

Agriculture

Moisture levels remained favorable across the district, boosting crop conditions. The wheat harvest was wrapping up, and production was down sharply from last year because of lower yields and fewer acres planted. While farmers were generally feeling positive about 2017 row crop production, they remained concerned about low crop prices and financial strain from not being able to cover production costs. Export demand for U.S. cotton will likely not be as strong this year due to average crop quality and higher global supply. The cattle industry continued to benefit from very strong beef demand, both domestically and internationally.

 

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