Eleventh District Beige Book

September 2, 2020

Summary of economic activity

Increasing COVID-19 infections in the Eleventh District have disrupted the budding economic recovery in some sectors and is the biggest risk to the near-term outlook. While manufacturing activity continued to expand and loan volumes increased in the financial sector, service sector activity declined overall in July but resumed its nascent recovery in August. Retail sales fell steeply in July but stabilized somewhat in August. Energy activity remained depressed. Activity in the housing market was a bright spot, with home sales rising sharply. Employment remained fairly stable, according to contacts. Input costs rose modestly while selling prices were flat to down. Outlooks were increasingly uncertain, with numerous contacts expressing concern over surging COVID-19 cases and the resulting disruption to business.

Employment and wages

Most contacts reported steady employment, though there were some reports of either layoffs or increased headcounts. Employment declines were centered in the energy industry and parts of the service sector. Manufacturing jobs recovered somewhat as more firms noted net hiring than noted net layoffs for the first time since January. Jobs grew in health care and professional and business services, while contacts more often noted employment declines in retail, leisure and hospitality, and transportation services. Energy contacts said more layoffs are coming, but that the worst is likely past.

Wage growth accelerated slightly in August; however, airlines and energy firms among others noted pay freezes and/or cuts.

Prices

Input costs rose at a moderate pace, except in oilfield services where costs were down 10-20 percent versus early-2020 contracts. Fuel costs have crept up and lumber prices have doubled since earlier in the year. Selling prices were largely flat.

Manufacturing

Manufacturing activity continued to recover, expanding moderately in July and August. Growth was led by high tech and construction materials manufacturing, while food manufactures noted a deceleration from previous months. Refiners noted that consumption of motor fuels had improved, but profit margins remained depressed. Manufacturing was still below normal levels, according to nearly three-fourths of contacts. They reported that July revenues were off by more than 30 percent from a typical July, on average.

Outlooks remained positive, and most manufacturers expect increased demand and production six months from now.

Retail sales

Retail sales fell steeply in July but stabilized somewhat in August. Wholesalers also noted declines, though not as pronounced. Auto dealers said sales were constrained by short inventories due to factory shutdowns or bottlenecks. One contact noted that they were not expecting normal new-vehicle inventory until September or October.

Just over three-quarters of retailers said July revenues were below normal, by about 22 percent on average. More than half of retailers said supply chain disruptions were restraining revenues, in addition to weak demand. Expectations for future activity declined substantially, and uncertainty rose sharply.

Nonfinancial services

Service sector activity declined overall in July after a short-lived expansion in June, but modest growth resumed in August. Face-to-face contact industries, such as leisure and hospitality, suffered as new COVID-19 cases rose sharply in Texas in July. However, while hotels have been hit hard, the single-family vacation rental market has been very strong. Airlines continued to struggle, with demand down 75 percent from a year ago according to multiple contacts, who also noted that business travel is virtually nonexistent. Colleges and universities across the district face logistical and financial challenges as they shift their fall semesters to a partially virtual environment with limited on-site learning and experience reduced enrollment. Some industries, like professional services, were less affected by COVID-19 trends and saw increased revenues in both July and August. Staffing contacts noted demand was stable recently but down year over year.

Roughly three-quarters of contacts said July revenues were below normal, by just over 30 percent on average. This magnitude of the shortfall was higher for leisure and hospitality firms, who said July revenues were off 46 percent, on average.

Outlooks worsened in July but improved in August, though uncertainty continued to climb, particularly regarding COVID-19 and the presidential election. When asked how likely it is that their business will permanently shut down within the next 12 months, 90 percent of contacts said it is not likely. Among leisure and hospitality firms, though, more than a quarter say it is at least somewhat likely their business will not survive to next July.

Construction and real estate

Activity in the housing market was a bright spot. Existing-home sales climbed sharply in July and remained solid in early August. Home builders continued to note widespread strength in sales. Contacts said record-low mortgage rates were driving sales, and inventories remained very tight for both resale and new homes. Builders noted strong sales have enabled them to raise prices. New development was active, and outlooks were optimistic.

Apartment leasing improved further in July, but rents were flat to down compared to year-ago levels and concessions have increased, particularly in areas where there is a lot of new product. Office leasing activity was modest and sublease space has increased. Industrial demand remained solid.

Financial services

Loan volume increased over the past six weeks, driven by a sharp rise in residential real estate lending. Commercial real estate lending stabilized after falling over the prior three periods, while commercial and industrial and consumer loan volumes continued to decline. Loan pricing fell further, and credit standards and terms continued to tighten. Another significant increase was seen in loan nonperformance, and nearly three-quarters of bankers expect further increases in loan defaults. Contacts report that 11 percent of loan volumes are currently on payment deferral due to COVID-19, on average, down slightly from the prior period. Requests for loan modifications were most prevalent among businesses in accommodation and food services as well as real estate and rental and leasing.

Outlooks were more pessimistic, with expectations for future loan demand turning slightly negative. Also, bankers voiced concern over the uncertainty about the PPP forgiveness process and that it could become arduous.

Energy

The Eleventh District rig count continued to erode over the reporting period, though well completion activity ticked up. Contacts continued to express a grim outlook. The recent increase in COVID-19 trends in parts of the U.S. and elsewhere is putting downward pressure on expectations for oil prices and fuel consumption. Contacts said it is unlikely that oil prices will reach above $50 per barrel anytime soon, which is roughly the average price at which Eleventh District firms need to profitably drill new wells.

Agriculture

Soil moisture conditions deteriorated across the western part of the district, where drought conditions intensified. Grain harvesting progressed and yields were fairly normal, though prices remained unprofitably low. Cotton prices inched higher over the past six weeks as demand exceeded expectations, though prices were still below break-even levels without government price supports. Cattle and dairy prices trended higher.