Eleventh District Beige Book
March 4, 2020
Summary of Economic Activity
The Eleventh District economy expanded moderately over the reporting period. Solid growth continued in nonfinancial services, and expansion in the manufacturing sector picked up to a more moderate pace. Housing demand continued to rise broadly, and sharply higher residential real estate lending boosted overall loan growth. Retail sales growth stalled out over the reporting period, and activity in the energy sector eroded slightly. Employment growth slowed to a modest pace, with a majority of hiring firms noting difficulty finding qualified workers. Upward wage pressures remained elevated. Input prices continued to rise while selling prices were mixed—holding steady in manufacturing but increasing in the service sector. Outlooks generally improved, though the coronavirus introduced new uncertainty into the business environment.
Employment and Wages
Employment growth slowed to a modest pace overall. Hiring continued at a moderate pace in the services sector but stalled in manufacturing, and layoffs continued in the oil and gas sector. Most energy contacts expect headcounts to fall further, albeit only slightly. A February Dallas Fed survey of roughly 375 Texas businesses in the services and manufacturing sectors showed that nearly two-thirds were currently trying to hire. However, 80 percent of those trying to hire were having problems finding qualified workers. Some contacts noted that lack of labor availability was a drag on business growth. However, there were scattered reports that softness in the energy sector has alleviated some labor pressures in the low-skilled and contract worker segments.
Wages continued to increase, with upward wage pressures holding slightly above average. The energy sector is an exception, as contacts report no wage pressure. Some contacts said they implemented cost of living adjustments to supplement their recruitment and retention efforts, and one contact said labor costs increased due to overtime pay for existing staff.
Input prices continued to rise outside the energy sector. However, in manufacturing, upward pressure on raw materials costs remained below average. Selling prices were largely flat in manufacturing but have started rising again in the service sector after stalling out late last year. Particularly strong price increases were seen in retail in February. Airline ticket prices were up compared to a year ago, partially due to the grounding of the Boeing 737 Max, which has constrained capacity.
Expansion in the manufacturing sector picked up to a moderate pace in January and February. Several firms reported a stronger than expected start to the year, and the acceleration spanned both durables and nondurables. Refinery utilization increased over the reporting period. Machinery manufacturing was a weak spot, with declining output over the reporting period. Also, softness continued at cross-border manufacturing plants in the El Paso area, with contacts saying they don’t expect significant increases in activity or capital spending plans following the ratification of the USMCA.
Several contacts noted that the coronavirus was negatively impacting their supply chain, particularly in high-tech and chemical manufacturing. While companies’ outlooks were slightly more optimistic than they had been over the past few months, uncertainty picked up.
Retail sales growth stalled out over the reporting period, with weakness led by autos and sales among nondurable goods wholesalers. An auto dealer remarked that maintaining a positive margin on new vehicle sales is impossible. Overall retail outlooks weakened slightly, with some contacts voicing concern over the coronavirus and its impact on supply chains and overall demand.
Solid expansion continued in the nonfinancial services sector, with many contacts reporting strong momentum at the start of 2020. Growth was led by professional and business services. Staffing services contacts noted solid broad-based demand, though most reported weak demand growth year over year. Multiple staffing contacts said that companies are slowing down hiring due to election uncertainty. In transportation services, airline demand remained strong and air and ground cargo volumes increased. A railroad contact voiced concern that the coronavirus could reduce shipments from China.
Outlooks continued to improve, though the coronavirus and the upcoming presidential election were noted as increasing uncertainty.
Construction and Real Estate
Housing demand continued to rise broadly, with contacts noting that sales were off to a good start this year and ahead of year-ago levels. Some builders were able to push through price increases to cover higher construction costs, though this exacerbated affordability problems in some metros. Rain delayed development and building activity in some areas. Outlooks remained favorable.
Conditions in the apartment market were stable, though contacts noted ongoing rent concessions due to supply-driven softness in Class A properties. Industrial demand remained robust and construction elevated. Office demand stayed solid in Dallas but was mixed in Houston.
Growth in loan demand increased moderately over the reporting period. Overall, loan volumes increased, driven primarily by a sharp rise in residential real estate loans. Commercial and industrial loan volumes decreased over the reporting period. Loan pricing continued its marked decline, and a majority of bankers continued to report no change in credit standards. Growth in general business activity picked up notably, and expectations for activity in the next six months improved significantly.
Drilling and well completion activity in the Eleventh District eroded slightly over the reporting period, but most contacts contend that activity is likely at or near a soft bottom. The industry remained distressed with limited access to capital. Contacts noted that the coronavirus has pushed oil prices down and is a big source of uncertainty. Most contacts expect that oilfield activity will hold roughly near December 2019 levels through the end of 2020, and they express modest optimism about 2021.
More than a third of Texas remained abnormally dry or in drought, though recent rainfall in some areas prompted optimism among producers heading into the new crop season. Row crop prices declined over the reporting period while cheese and milk prices trended higher. Agricultural lenders said farmers generally came out of 2019 in pretty good shape with the help of government support payments, but that there is some concern going forward as income from government assistance has been on the rise the past couple of years, making farmers more vulnerable to policy changes. Contacts said uncertainty regarding demand and prices for agricultural commodities was discouraging, and while producers were optimistic about trade developments, there is still a fair amount of concern about follow through in the Phase One deal with China as well as the impact of the coronavirus on commodity prices.
Find the full Beige Book report at www.federalreserve.gov/monetarypolicy/beige-book-default.htm
For more information about District economic conditions visit: www.dallasfed.org/research/texas