Reports on Regional Economic Activity
Eleventh District Beige Book
October 18, 2017
Summary of Economic Activity
The Eleventh District economy continued to expand at a moderate pace over the past six weeks, and most contacts do not expect significant long-term disruption due to Hurricane Harvey. Manufacturing output strengthened, and activity in nonfinancial services increased. Retail sales growth continued to accelerate, with a surge in auto sales to replace vehicles damaged by the hurricane. Homes sales weakened during the reporting period and prices were flat. Growth in the financial services and energy sectors continued but at a slower pace, and crop conditions remained mostly favorable. Employment, wages and prices increased, particularly in manufacturing. Outlooks remained positive overall.
Employment and Wages
Overall employment rose, and upward wage pressure persisted. Hiring picked up in manufacturing, continued at about the same modest pace in services, and abated slightly in the energy sector. Reports of labor shortages persisted, spanning most industries. Some manufacturers said the difficulty finding workers was impeding their growth, and some services firms said it was driving up overtime costs. More than a quarter of firms expect that the impact of Hurricane Harvey will make finding and hiring workers more difficult over the next six months. In construction, builders were concerned that once post-hurricane repair and rebuilding work begins, there likely will be skilled-worker shortages and increases in labor costs. Other contacts noted that they also pull from a labor pool that is likely to be in higher demand in the aftermath of the storm.
Selling prices increased at the same or faster pace over the past six weeks, and contacts noted upward pressure on input costs. Prices and costs rose at a faster clip in the manufacturing and energy sectors, while upward pressure was largely unchanged on the services side. New home prices were mostly flat, but there is continued pushback from buyers on pricing at the higher end. Some builders were offering discounts and/or incentives to entice buyers, particularly on inventory homes. Gasoline and diesel prices rose over the reporting period, as did oil prices.
Robust expansion in the manufacturing sector continued, despite some disruption among Texas Gulf Coast producers in the wake of Hurricane Harvey. Output growth picked up further for durable goods in September, led by increases in computer and electronic product manufacturing. Fabricated metals production rebounded, and output among energy-related firms overall continued to exhibit strength. Meanwhile, nondurable goods production slowed. A majority of chemical producers noted production held steady or declined over the reporting period, with a number of executives saying Hurricane Harvey had a negative impact on logistics like transportation and availability of raw materials. Refinery capacity hampered by the storm was ramping back up quickly, with little damage to infrastructure. While it may take some time for supply chains to recover, the storm's impact on the refining and petrochemical industry are projected to be transitory. For Texas manufacturing overall, outlooks were positive and more optimistic than during the prior reporting period.
Retail sales growth continued to accelerate despite Hurricane Harvey, according to firms surveyed three weeks after the storm. Nearly two-thirds of stores along the Texas Gulf Coast said they were negatively impacted by the hurricane, and on average those stores were shut down for about four days and experienced a reduction in revenue for about 10 days. Auto sales surged, partly due to increased demand for replacement vehicles after the storm. An auto dealer in Houston said sales were incredibly strong, noting that several hundred thousand vehicles had been flooded, and another dealer expects elevated demand to last about six months. For the broader retail sector in Houston, rebuilding efforts were fueling a rise in retail sales and demand for warehouses in the area from building supply companies. Outlooks for business in general were quite positive, an improvement from the mixed outlooks during the prior reporting period.
Demand for nonfinancial services continued to expand moderately over the past six weeks. There were some reports of Hurricane Harvey disrupting business, with those contacts noting the impact lasted one to two weeks on average. About a third of firms expect a net negative impact on revenues over the next six months from the storm, while nearly half expect no change on net and the balance anticipate an increase. Some staffing services contacts have seen a rise in demand for accounting and data entry positions related to the hurricane damages, as well as for call center employees and insurance adjusters. Staffing contacts generally think business activity will return to normal (pre-hurricane) by year's end, and an oil and gas staffing firm noted that "things are close to normal again" in Houston already.
Strength in the nonfinancial services sector was led by professional and technical services, with firms generally noting stronger revenue gains over the past six weeks, as well as transportation services. The healthcare industry remained rather weak, with contacts saying they were continuing to struggle with lower demand and rising costs. Leisure and hospitality also exhibited weakness over the past six weeks, particularly along the Gulf Coast and Mexican border.
Construction and Real Estate
Overall, home sales weakened during the reporting period. However, contacts in Austin and Dallas–Fort Worth (DFW) noted continued strength in sales of low- to mid-priced homes. In Houston, storm damage to single-family homes was reported to be much more extensive compared with other property types. Contacts expect new home starts and closings in Houston to be behind schedule for the remainder of the year.
Apartment demand was generally disappointing in the third quarter, following a solid second quarter. Rent growth slowed and was below average in some large metros. In Houston, however, apartment leasing activity picked up, occupancy rose and rent concessions have diminished following Hurricane Harvey. The office market was generally characterized as solid in DFW and San Antonio, but still weak in Houston.
Loan demand continued to increase over the past six weeks, albeit at a more sluggish pace than during the prior period. Growth was led by commercial real estate loans, where volumes continued to rise at a moderate pace. Volume growth abated for commercial and industrial loans as well as for residential real estate loans, and consumer loan volumes declined slightly. Credit standards and terms tightened. Core deposit volumes grew again and net interest margins continued to increase. Outlooks in the financial sector remained optimistic.
Energy activity continued to expand, but at a slightly slower clip in the third quarter. Drilling activity in the Eagle Ford Shale and offshore has resumed normal operations after the hurricane. Overall growth in oil and gas production continued, but oilfield services firms noted weaker demand growth. Drilling activity is expected to decline slightly by the end of 2017, and demand for oilfield services is softening outside of the Permian Basin. However, six-month outlooks for 2018 were more optimistic relative to the last reporting period, and uncertainty has moderated.
Crop conditions remained favorable, although Hurricane Harvey hampered agriculture in the Coastal Plains. The extent of the impact is not yet known, but some livestock were lost and a small portion of the Texas cotton crop was damaged. Some rice and soybeans were also affected, but likely minimally. Overall, grain production was strong, with particularly robust yields in Northeast Texas. There is good moisture for planting winter wheat, but while wheat prices are higher than a year ago they are still generally below breakeven levels. Agricultural producers remain concerned about low crop prices, NAFTA negotiations, and the configuration of the next farm bill.
Find the full Beige Book report at www.federalreserve.gov/monetarypolicy/beige-book-default.htm