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Eleventh District Beige Book

November 29, 2017

Summary of Economic Activity

The Eleventh District economy continued to expand at a moderate pace over the past six weeks. Manufacturing output strengthened, and activity in nonfinancial services increased. Retail sales growth continued but at a slower pace as the post-hurricane auto sales rush abated somewhat. Home sales rose during the reporting period. Loan demand was flat, and energy activity was largely unchanged. Crop conditions remained mostly favorable. Employment, wages and prices continued to increase, and widespread reports of a tight labor market persisted. Outlooks remained positive overall, and generally a bit more optimistic than in the prior reporting period.

Employment and Wages

Overall employment growth remained solid, and upward wage pressure persisted at slightly elevated levels. Hiring picked up in the service sector, continued at about the same robust pace in manufacturing, and abated slightly in the energy sector. Labor market tightness carried on in most industries. Worker shortages were reported throughout the oil and gas supply chain and in construction, with contacts saying the scarcity of labor was driving up wages for certain types of workers. Similar reports came from manufacturing (particularly high-tech), airlines, and health care. Some banks reported that labor was becoming a bigger issue than regulatory compliance. Looking ahead, roughly two-thirds of contacts expect to increase employment over the next twelve months, largely citing an expectation of high sales growth as the impetus. Several firms said that the inability to find workers with the required skills was the main restraint for hiring plans.

Prices

Pressure on selling prices remained elevated over the past six weeks. A pickup in price growth was noted among nonfinancial services, retail and construction firms. However, an airline noted falling ticket prices due to increased competition. New home prices were mostly flat, with some builders offering discounts and/or incentives on higher-end houses due to push back from buyers at that price point. Oil and diesel prices rose over the reporting period, while gasoline prices exhibited mixed movements--falling from post-hurricane highs then rebounding in early November.

Manufacturing

There was further pickup in the robust expansion in the manufacturing sector. A rebound in output growth for nondurable goods was seen in October, driven largely by chemical and food production. Strength continued in durable goods manufacturing, led by increases in transportation equipment production. Output growth among firms closely tied to energy was weaker than overall manufacturing in October. While refinery and chemical plants were largely back to normal operating rates after Hurricane Harvey, contacts said the storm caused a setback of one to two quarters of construction time for new facilities along the Gulf Coast. Refining margins were healthy, and sentiment was bullish through next year. For Texas manufacturing overall, growth in new orders picked up and outlooks remained highly positive.

Retail Sales

Retail sales continued to expand, albeit at a slower pace than in the prior reporting period. Auto sales decreased from the initial post-hurricane surge but remained high. A clothing retailer noted that Houston-area stores benefited from the Astros playoff and World Series excitement, as well as some additional spending by flood victims. Along the border, several contacts noted ongoing concerns regarding a decline in demand for American goods by Mexican customers. Outlooks among retailers in general remained quite positive.

Nonfinancial Services

Demand for nonfinancial services continued to expand moderately over the past six weeks. There were scattered reports of lingering effects from Hurricane Harvey, but for the most part business had returned to normal. Transportation services were a key driver of faster growth this period. Rail cargo volumes were up, particularly for frac sand and building products. Volumes for air cargo as well as containers and trailers also rose. Staffing services firms noted increased demand and broad-based strength. In North Texas, logistics, manufacturing, health care, call centers, and IT exhibited particularly strong demand for placements. Revenues in the leisure and hospitality sector rebounded in October after declining in the wake of Hurricane Harvey in September, but there were some businesses still recovering. Overall, outlooks were optimistic and improved from six weeks ago, although concerns remained. Some contacts noted that uncertainty surrounding federal tax reform, health care, and government regulation was making it difficult to plan for 2018.

Construction and Real Estate

Home sales rose during the reporting period, although the pace of growth varied across regions. Contacts in Houston generally noted a rebound in sales activity following Hurricane Harvey, but there were some reports of weakness in areas affected by flooding. Respondents in Austin and Dallas-Fort Worth (DFW) reported slowing in the pace of sales growth, which some contacts in DFW attributed to buyers concerned about changes to immigration policy.

The apartment market was slowly returning to a normal pace of growth following a few years of above-average expansion, according to contacts. While overall conditions have improved in Houston's apartment market following Hurricane Harvey, one contact said rent concessions have slowly started to creep back in some areas where there is a plethora of new supply.

The office market remained mostly weak in Houston, despite a decline in sublease inventory and a pickup in investment sales activity. Office demand was solid in Dallas, and industrial market activity was reported to be stable in both metros.

Financial Services

Demand for loans was flat over the past six weeks. According to contacts, loan volumes increased, but the pace of growth continued its downward trend over the past three reporting periods. The slowdown in loan volume growth was seen in commercial and residential real estate, while commercial and industrial loan growth edged up. Contacts again reported a slight decline in consumer loan volumes. Core deposit volumes increased, as did interest rates paid on them. Financial industry contacts noted improvement in general business activity over the past six weeks, and also expressed higher levels of optimism for the six-months-ahead horizon.

Energy

Energy activity was largely unchanged from six weeks ago, despite an increase in oil prices. Drilling activity declined as the Texas rig count fell, but well completion and production activities increased. Demand for oilfield services in the Permian Basin remained healthy, and declining activity outside the Permian Basin may stabilize with the stronger oil prices, according to contacts. Outlooks for 2018 remained conservative, but were more optimistic than the last reporting period.

Agriculture

Crop harvesting continued at a normal pace, with generally favorable crop conditions. An estimate from Texas A&M University puts agricultural losses from Hurricane Harvey at $200 million, which is not as high as expected and far less than what was seen from Hurricane Ike in 2008 and Hurricane Irma. Texas corn and sorghum production is expected to be down in 2017 largely because of fewer acres planted, while cotton production is expected to be up more than 10 percent this year, according to the USDA. There was still financial stress in the farming sector, with producers primarily concerned about low crop prices across the board. On the livestock side, pasture conditions were fair to good and cattle prices increased sharply over the last six weeks largely in response to strong domestic demand and booming exports.

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

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