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Eleventh District Beige Book

September 12, 2018

Summary of Economic Activity

Solid expansion continued in the Eleventh District economy, although the pace eased slightly compared with the last report. Manufacturing output increased, and loan demand and retail spending accelerated. Broad-based expansion in the service sector continued. Home sales slowed, and drilling activity was flat. The ongoing drought dampened crop and grazing conditions. Employment increased, and widespread labor shortages continued to pressure wages. Price pressures stayed elevated largely due to increases in input costs. Although outlooks remained fairly optimistic, trade-related concerns have heightened uncertainty.

Employment and Wages

Job growth continued to be widespread across sectors. Labor shortages persisted, covering a wide range of industries and skill sets, and several contacts said that a lack of qualified candidates was constraining growth. Poaching of skilled labor in midstream construction was reported, and a staffing firm said they had cancelled retainer contracts with some customers in order to recruit those firms' employees for active clients.

Wage pressures remained elevated, with more than 60 percent of firms saying they were increasing wages and/or benefits to recruit and retain employees. Upstream energy firms reported significant pressure to raise wages in the Permian Basin despite flattening of the rig count, and midstream and downstream energy companies also cited rising wage pressures, particularly for personnel with less than five years of experience. A transportation services firm was offering up to $15,000 in multi-year sign-on bonuses in some areas. Retailers noted difficulty filling lower-level positions, with several contacts reporting starting wages of $15-$16 per hour to remain competitive. Nearly 60 percent of firms said they were unable to pass higher labor costs to customers through price increases.

Prices

Price pressures remained elevated in part due to tariffs, although they did ease slightly over the reporting period in manufacturing and retail. Price pressures were little changed in the service sector. Firms' ability to pass on higher costs to customers was limited, although a few did mention plans to raise prices in the near term. Fuel prices were flat over the reporting period. The price of West Texas Intermediate (WTI) crude oil remained in the high $60s; however, prices received by some producers were reportedly $10-$17 lower due to limited pipeline capacity.

Manufacturing

Robust expansion continued in the manufacturing sector. Output growth strengthened for durables, led by a pickup in fabricated metals and in computer and electronic product manufacturing. Machinery production remained solid, while demand for primary metals and transportation equipment manufacturing was flat. Among nondurables, food and chemical production increased. The Gulf Coast refinery utilization rate climbed further to 99.4 percent in mid-August. Relatively low domestic feed costs and expectations of healthy global demand boosted refiners' and chemical producers' outlooks. Overall, outlooks among manufacturers remained positive, although tariffs have increased uncertainty in expectations.

Retail Sales

Retail sales accelerated during the reporting period. Online sales remained solid, and seasonal retailers noted a marked increase in activity. A clothing retailer said sales along the border were trailing other areas. Auto sales strengthened in August following weakness in July. While outlooks stayed positive, concern over tariffs and rising interest rates was noted.

Nonfinancial Services

The nonfinancial services sector expanded broadly, with revenue growth firming up among healthcare, real estate and leasing services, and administrative and support services firms. Staffing services firms said high levels of demand were sustained by broad-based growth across geographies and industries. Activity in the transportation services sector remained markedly strong, with rail traffic solid across nearly all business lines and continued robust growth in container volumes. Courier cargo volumes rose year over year. Airline passenger demand remained stable, and continued strength was expected in most markets. Revenue growth was moderate in the professional and business services and the leisure and hospitality sectors. Expectations regarding future business conditions stayed optimistic, although higher fuel prices, labor shortages, and uncertainty surrounding trade policies remained sources of concern.

Construction and Real Estate

Activity in the housing market softened over the reporting period, with most contacts noting slower-than-expected new-home sales. Existing-home sales were flat but remained near recent highs. Apart from the seasonal slowing, contacts said the recent heat wave, rising interest rates, and lower creditworthiness of entry-level buyers were affecting overall sales. Buyers remained price sensitive, and builders' noted compressed margins at the higher price points, as well as discounting on speculative inventory homes in some locations. Contacts expressed trepidation about the impact of higher interest rates, rising building costs, and uncertainty surrounding trade and immigration policies on future sales, and some added that they expect starts to flatten out in the near term.

A large number of new apartments continued to suppress rent growth in most major metros. Net absorption of office space moderated in Dallas-Fort Worth and remained weak in Houston in part due to the broader national trend among firms to move out of larger spaces into more efficient, smaller ones.

Financial Services

Loan volumes and demand expanded at a faster pace. Growth remained broad based, with continued strength in commercial and residential real estate lending and a notable pickup in commercial and industrial loan volumes. Consumer loan growth slowed. Loan pricing rose further, albeit at a slower rate. The volume of core deposits expanded, and bankers noted an increase in the cost of funds and continued pressure to raise deposit rates. Contacts remained optimistic, although they cited flattening of the yield curve, tariffs, and regulatory compliance as top concerns.

Energy

Drilling activity in the Eleventh District leveled off as pipeline capacity constraints put downward pressure on prices received by oil and gas operators in the Permian Basin relative to major oil benchmarks like WTI. The smaller independent companies are being hurt by the lower wellhead prices, which are near or below their breakeven levels; however, so far the discounts are not deep enough to shut in production. In contrast, margins have improved for oilfield services firms that were able to increase prices earlier in the year. Outlooks remained positive as additional pipeline capacity is expected to be operational in 2019.

Agriculture

Lack of soil moisture continued to dampen agricultural conditions in Texas, with more than half the state experiencing drought. The corn and soybean crops were generally in fair to good condition, while pastures and the cotton and sorghum crops were mostly in fair to poor condition. Texas crop production this year is expected to be down 27-33 percent from 2017, depending on the crop, according to USDA estimates. There is also concern among the agricultural community about tariffs and trade wars. However, a potential bright spot for Texas agricultural producers is the high probability for an El Nino climate pattern this winter, which could mean cooler and wetter weather for the state.

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

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