Eleventh District Beige Book
October 21, 2020
Summary of Economic Activity
Economic growth resumed in the Eleventh District after a spike in COVID-19 infections over the summer disrupted the budding recovery. Growth in the services and manufacturing sectors picked up pace in September, and retail sales increased. However, revenues remained well below normal levels in most industries. The housing market continued to perform well. In the banking sector, real estate lending picked up further but was offset by declines in consumer and commercial and industrial loan volumes, and most contacts expect an increase in nonperforming loans over the next six months. Energy activity remained depressed but started to show some signs of improvement. Employment in the district edged higher, with increasing reports of hiring. Input costs rose modestly while selling prices were flat to up slightly. Outlooks were largely positive but highly uncertain, particularly with regard to the presidential election and the unknown trajectory of the COVID-19 pandemic.
Employment and Wages
Employment edged higher, with increasing reports of hiring in certain sectors, including manufacturing. A Dallas Fed survey of well over 200 Texas service sector executives showed that 12 percent of services firms increased employment levels on net in September, which exceeded the share noting net layoffs for the first time since February. Hiring was particularly strong in financial and business services, while recent job growth in health care abated. Airlines continued facilitating voluntary separations and some have now begun furloughing or laying off workers. Job losses continued in the energy sector, though at a more modest pace. Energy contacts noted that though the worst is likely past, more layoffs are coming, especially among exploration and production companies.
Wage growth remained subdued in September. In the energy sector, wages remained frozen and some firms still have pay-cuts in place.
Input costs rose at a moderate pace, except in transportation and oilfield services where costs were down somewhat. Selling prices were flat to up slightly, with more pronounced increases in the retail and wholesale sectors.
Recovery in the manufacturing sector picked up steam in September, with production accelerating and outlooks continuing to improve. Month-over-month production increases were seen in both durables and nondurables manufacturing. Nonetheless, about 60 percent of manufacturers said business is still below normal levels, by about 30 percent on average. Petroleum refiners saw a decrease in production and utilization rates due in part to tropical storms curtailing operations. Margins among refiners and chemical manufacturers remained depressed. Overall, sentiment among manufacturers regarding broader business conditions remained positive, though uncertainty persists, particularly surrounding the election.
Retail sales surged in September, according to contacts. Even still, more than half said revenues were still below normal levels. Growth over the reporting period was led by nondurable goods and building materials sales. Auto sales remained weak, with multiple contacts citing supply chain delays. Among retailers overall, outlooks and expectations of future activity remained positive.
Growth in nonfinancial services activity picked up notably in September after the recovery faltered in July and August in the wake of sharply rising COVID-19 cases. The recent pickup was led by professional and business services, which saw a marked acceleration in revenue growth over the reporting period. Leisure and hospitality also saw some recovery in revenues, but contacts noted that with uncertainty surrounding the spread of COVID-19 there has been little change in visitor activity. While above-average growth was seen in nonfinancial services overall over the past six weeks, the sector has not yet recovered from the COVID-19 downturn. As of September, still more than 60 percent of contacts said revenues were below normal. Airlines noted that demand improved over the reporting period but was still down sharply year over year, and that corporate travel continued to be nearly nonexistent.
Looking ahead, outlooks continued to improve, and half of contacts expect increased revenue six months from now, exceeding the less than twenty percent that expect a decrease.
Construction and Real Estate
Activity in the housing market remained solid. Home sales continued to outperform expectations, though the pace was not as robust as in the previous reporting period. Builders said they are raising prices to cover higher construction costs and slow down sales as backlogs remained high. Some contacts noted pouring slabs and holding off on framing houses due to crew shortages and high lumber prices. There were also widespread reports of supply chain issues, particularly for appliances and windows. New home development was active, and inventories continued to be exceptionally tight. Outlooks were generally optimistic, with some concern about the impact of the upcoming elections and a weak labor market on future sales activity.
Apartment demand rebounded in the third quarter, but rents were flat to down compared with year-ago levels and concessions were high, particularly in areas where there's a lot of new apartment units. Office leasing activity weakened further, and available sublease space increased notably in the third quarter. Retail market conditions stayed fragile, while industrial demand continued to be strong.
Overall loan volume held fairly steady over the reporting period, with gains in real estate lending offset by declines in consumer and commercial and industrial volumes. In a Dallas Fed survey of 78 financial institutions, just over a quarter reported an increase in nonperforming loans over the past six weeks while more than 60 percent expect an increase in nonperforming loans six months from now. Contacts believe commercial real estate loans carry the greatest downside risk in terms of credit performance.
In preparation for an increase in past due loans, the majority of contacts were monitoring loan performance more closely and setting aside additional reserves for loan losses. Also, about 70 percent of bankers expect lower profitability over the next six months. Cost cutting measures focus on lowering interest rates on deposits and reducing employment and/or worker compensation. Despite challenges, perceptions of general business activity improved notably, and loan demand outlooks turned positive.
The Eleventh District rig count remained near historical lows but increased over the reporting period for the first time since the beginning of the year. Most contacts are confident that oilfield activity has stabilized and begun a long slow slog toward recovery. Well completions rose as producers began bringing uncompleted wells into production. Contacts mentioned that the recovery of oil consumption is their primary near-term concern, although uncertainty in both domestic and global affairs, particularly surrounding the U.S. election, are also worries. Most executives don't expect the U.S. oil rig count to increase substantially until the price of oil is at least $51 per barrel.
Soil moisture conditions deteriorated further across the western part of the district, where drought conditions continued to intensify. Row crop harvesting progressed and yields were quite strong, notably higher than last year for several crops. Grain prices generally improved over the past six weeks and will have reached profitable levels if production is at least average. Drought hampered pasture conditions in parts of the district, which coupled with increased feed costs strained livestock producers. Contacts expressed concern over the La Niña weather pattern that has developed and is likely to persist through the winter, which will bring drier weather and could hinder crop and pasture conditions.
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