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Eleventh District Beige Book

July 15, 2020

Summary of Economic Activity

The Eleventh District economy regained its footing following unprecedented declines in the previous two reporting periods. Activity in the manufacturing and service sectors began rebounding, as did retail spending. However, the level of output and demand remained below pre-COVID levels. Loan volumes contracted at a modest pace, and drilling activity fell to new lows. Activity in the housing market expanded, with new home sales outperforming activity in the existing-home market. Employment stabilized, according to contacts, but overall labor market conditions remained weak. Wages were flat to slightly up. While input costs rose modestly, selling prices generally dipped further. Outlooks improved, but a weak economy, depressed activity in the energy sector, the resurgence of COVID-19 infections, and a pause in the reopening of the district economy were causing concern among contacts.

Employment and Wages

Most contacts reported holding employment steady. Manufacturing and service sector employment was flat, with scattered reports of hiring, while energy contracted. Forty-three percent of respondents to a June Dallas Fed survey of 400 Texas manufacturing and services firms indicated reduced employment levels due to COVID-19 and, among this group, 26 percent said it would take more than a year to get back to pre-COVID headcounts and 19 percent said they do not ever expect employment to get back to pre-COVID levels. Also, many contacts cited challenges in bringing workers back given rising infection rates, quarantined employees, and confirmed positive COVID-19 cases among staff.

Wages were flat to slightly up; however, airlines and energy firms among others noted pay cuts and/or freezes. Companies looking to hire along with staffing firmsnoted difficulty recruiting due to lack of applicants and/or high unemployment insurance benefits.

Prices

Input costs rose at a modest pace, in part due to supply-chain issues, rising freight costs, and precautions being taken by firms to protect staff and customers from exposure to COVID-19. Selling prices were flat to down due to weak demand, though there were reports of increased prices for new and used vehicles arising from inventory shortages. New home prices rose slightly, and homebuilders noted getting only modest relief from contractors and suppliers on pricing. Airline ticket prices held steady or dipped. Staffing firms reported no change in bill rates, while some oilfield services firms said prices were down 10-15 percent vs. earlier in the year.

Manufacturing

Output growth rebounded in June following steep declines in the previous three months. Durables and nondurables increased, led by strength in transportation equipment, food, printing, and construction-related manufacturing. Declines in the oil and gas industry remained a significant headwind among those experiencing sustained weakness. Refiners and chemical manufacturers noted modest improvements in utilization rates, though margins were still depressed. Chemical firms said demand for PPE and disinfectant products remained robust, but resin and basic chemical demand was soft. Manufacturing outlooks improved, though the recent spike in COVID-19 cases and a weak economy weighed on business sentiment.

Retail Sales

Retail sales rebounded sharply in June, albeit from depressed levels. A majority of respondents noted an increase in sales activity, though reports regarding the pace of growth were mixed. Auto dealers cited a pickup in demand, with reports of strength in all-terrain vehicle (ATV) sales. Inventories dropped further, particularly for auto dealers, which some contacts attributed to supply-chain issues. Outlooks were optimistic but contingent upon a stabilization of COVID-19 cases.

Nonfinancial Services

Service sector activity rose modestly in June, following a period of declining demand from March through May. Performance was mixed across industries, with those experiencing sluggish activity citing weakness in the oil and gas sector, continued operational restrictions, and weak demand. Health care firms saw a strong pickup in demand. Some professional and technical services firms said they were benefitting from strength in the residential real estate market. Activity in the leisure and hospitality sector rebounded but remained well below last year's levels. Airline passenger demand grew modestly during the reporting period; however, it remained markedly lower compared to year-ago levels. Domestic demand was driven by leisure travel, and overseas travel remained limited. Demand for staffing services was flat to down during the reporting period. Outlooks were mixed and generally uncertain due to the resurgence of COVID-19, and concern about future consumer demand trends.

Construction and Real Estate

Activity in the housing market improved markedly. Existing-home sales fell in May partly due to a lack of inventory, but picked up in June. Showings were up as well, indicating increased buyer interest. New-home sales strengthened, with several contacts noting a record month in May and continued solid activity in June. Contacts said record-low mortgage rates were driving sales, with the pace of sales higher in the low- to mid-price range. After a temporary pause, new development activity was picking back up, and contacts noted evaluating new lot/land deals and/or moving forward with planned acquisitions. Outlooks have improved significantly, but there was lingering concern about the demand impact in the fall of a weak labor market, the upcoming election, and virus flare ups.

Multifamily contacts said leasing activity weakened in early to mid-spring due to COVID-19, but has improved since then. Rents were flat to down, and concessions have increased. Apartment rent collections continued to outperform expectations, but the upcoming expiration of federal unemployment benefits was a downside risk to the outlook. Office leasing remained sluggish, though it did improve slightly compared to the previous reporting period. Activity was concentrated in short-term renewals and/or smaller-sized deals. Industrial demand remained solid.

Financial Services

Loan demand fell, though at a more moderate pace than in the previous reporting period. Volumes weakened further for all loan types except for residential real estate, which rose sharply. Loan pricing continued its marked decline, and credit standards tightened further. Loan performance eroded noticeably, and majority of respondents expected further deterioration. Nearly 19 percent of banks observed an increase in draws on existing commercial credit lines due to COVID-19, down from 37 percent from six weeks ago. On average, bankers said roughly 15 percent of their total loans were currently in deferral. Expectations regarding general business conditions improved, and the outlook for future loan demand turned positive for the first time since March.

Energy

Eleventh District drilling activity eroded further but showed signs of stabilizing by the end of the reporting period. Meanwhile, well completion activity stabilized and logged modest weekly gains. Though overall oilfield activity remained depressed, sentiment has improved due to a pickup in oil prices, and a majority of firms expect to restart shut-in wells by September. The recent increase in COVID-19 cases and hospitalizations was causing some concern among contacts. Most contacts don't expect U.S. crude oil production to return to pre-COVID levels until at least mid-2021.

Agriculture

Soil moisture conditions remained favorable across most of the district, except for the Texas Panhandle area where there was drought. Wheat remained a bright spot with production up from last year, though prices were lower. While overall crop conditions were favorable, lower-than-profitable prices were leading agricultural producers to rely on government support payments to supplement farm income. On the livestock side, meat packers were adjusting to the new operating environment and have ramped production back up. Dairy prices rose as the industry made a concerted effort to curb production in response to lower restaurant demand.

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

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