Reports on Regional Economic Activity
Eleventh District Beige Book
December 5, 2018
Summary of Economic Activity
Expansion in the Eleventh District economy slowed to a moderate pace during the reporting period. A broad-based deceleration was seen across the manufacturing and retail sectors and in loan volume growth. Home sales were soft partly due to tight inventories and rising mortgage rates. Conversely, drilling activity increased and ample rainfall boosted crop conditions. Employment expanded, despite widespread labor shortages. Wage pressures were strong, and tariffs drove up input costs. Outlooks were less optimistic than the previous report due to increased uncertainty arising from trade disputes, rising interest rates, labor market constraints, and postelection politics.
Employment and Wages
Widespread job growth continued, despite tight labor markets. Labor shortages remained pervasive across industries and skill sets but were the most severe for mid-skilled positions such as truck drivers and blue-collar workers in manufacturing, construction, and energy. Most companies said they were struggling to find qualified workers, and many noted settling for less-qualified candidates to fill vacancies.
Upward wage pressures remained strong and prevalent, although they did ease somewhat in manufacturing. Many firms noted raising wages to recruit and retain workers, and also using non-wage-based incentives such as better benefits, improved working conditions, and bonuses. A staffing firm said it had become difficult to hire for positions paying less than $15 an hour in Dallas–Fort Worth following Amazon's announcement to raise its minimum wage. A manufacturing equipment supplier reported frequently raising wages to prevent its employees from being poached by other firms, and one contact noted high employee turnover despite paying their groundskeepers $20 an hour.
Input price pressures remained elevated in part due to tariffs, particularly in manufacturing and construction, and firms were struggling to pass these higher costs onto customers. Input and selling price pressures eased in retail, while pricing pressures in other service sectors were largely unchanged. Natural gas prices rose since the last report, while West Texas Intermediate crude oil prices fell from their recent highs. Fuel prices dropped even further, hurting refiners' margins.
Expansion in the manufacturing sector slowed during the reporting period, and outlooks were less optimistic than they have been all year. Output growth softened notably in November, with the tariffs, labor constraints, and trade policy uncertainty cited as damping factors. The slowing was broad based but most pronounced in fabricated metals, construction related products, computer and electronics, and food manufacturing. The Gulf Coast refinery utilization rate remained high, while chemical production flattened during the reporting period. Outlooks among downstream energy firms stayed optimistic, although petrochemical companies were experiencing margin compression from higher costs.
Retail sales expanded at a slower pace compared with the previous reporting period. Online sales grew modestly as did motor vehicle sales, but some auto dealers said rising interest rates were shrinking margins. Sales at stores located along the Texas/Mexico border worsened partly due to weakness in the peso/dollar exchange rate, and building material and garden equipment suppliers noted flat activity. Retailers' outlooks were less positive than the last report as tariffs and rising interest rates negatively impacted expectations.
The nonfinancial services sector expanded broadly, with revenue growth firming up among healthcare, information services, and accommodation and food services firms. Demand for staffing services generally remained brisk and broad based, with particular strength noted in orders for healthcare staff, oilfield services labor, and blue-collar workers such as electricians, welders, and plumbers. Activity in the transportation services sector was solid. Courier and air cargo volumes expanded. Rail traffic stayed strong across most business lines, outside of a decline in building products shipments that was driven partly by a slowing housing market. Airlines said passenger demand remained stable and continued strength was expected in domestic air travel. Revenue growth was lackluster among professional, scientific, and technical services firms. Contacts were less optimistic in part due to uncertainty stemming from trade issues and politics.
Construction and Real Estate
Activity in the housing market was soft over the reporting period as the recent rains and rising interest rates affected traffic and sales activity. Still, sales of moderately priced homes mostly remained solid. The wet weather also delayed lot development and homebuilding activity. Home prices were flat to up, and contacts noted usual year-end discounting. Outlooks remained positive, although there is increased trepidation about the impact of rising mortgage rates and/or high construction costs on future sales.
Conditions were little changed in the apartment market, and contacts noted some supply-driven softness at the high-end (prime Class A properties). Investor interest in multifamily properties was high, particularly in Austin and Houston. Industrial and retail markets generally remained healthy.
Growth in loan volumes moderated over the reporting period. The deceleration was broad based across categories, including commercial and industrial, commercial real estate, and residential real estate. Consumer loan volume growth held steady. The cost of funds and loan pricing rose further, and many contacts noted that loan pricing remained very competitive. Deposit volumes expanded, albeit at a slower rate. Despite the slowing in loan growth, outlooks remained optimistic.
Drilling activity in the Eleventh District increased, but the number of new wells brought into production in the Permian Basin continued to lag due to ongoing pipeline and transportation capacity constraints. The completion of a new pipeline project ahead of schedule has narrowed the spread between in-basin and West Texas Intermediate crude oil prices. Margins of oilfield services firms continued to be pressured by high costs and increased competition. Conversely, growing supplies of local sand and improvements in operational efficiency supported producers' margins. Overall, outlooks remained positive.
Agricultural conditions improved further, with less than one percent of the state in drought as of mid-November. Ample rainfall has built up ground moisture reserves, boosting crop prospects for 2019. However, excessive precipitation in some areas has delayed planting of the winter wheat crop and caused some quality issues for cotton. Overall, agricultural producers were quite optimistic, although some continued to experience financial difficulty from drought conditions earlier in the year.
Find the full Beige Book report at www.federalreserve.gov/monetarypolicy/beige-book-default.htm