Reports on Regional Economic Activity
Eleventh District Beige Book
December 2, 2020
Summary of Economic Activity
The Eleventh District economy expanded at a modest pace, but activity in most industries remained below normal levels. Recovery in the manufacturing, retail, and services sectors slowed. The housing market continued to outperform expectations, but office leasing remained weak. Overall loan volume fell, though residential real estate lending continued to be robust. Energy activity remained depressed but showed some signs of improvement. Employment rose modestly, and several firms said weak demand and uncertainty about the course of the pandemic and/or related regulations were a drag on hiring. Input costs rose moderately, while selling prices were flat to up slightly. Outlooks were generally positive but uncertain, with political uncertainty and the trajectory of the pandemic weighing heavily on growth expectations for 2021.
Employment and Wages
Employment rose modestly, with continued reports of hiring in certain sectors such as single-family home construction and manufacturing. Most firms looking to hire said they've been able to do so without difficulty, though some staffing firms cited challenges due to unemployment insurance benefits. Voluntary separations and/or job losses continued in the air transportation and energy sectors. Several firms said continued weak demand and uncertainty about the course of the coronavirus pandemic as well as related regulations and government policies were a drag on hiring, with a few noting it would take more than two years to reach their pre-pandemic employment level.
Wage growth remained subdued, with most firms noting that they were not raising salaries or wages to attract new hires or retain existing employees. Some contacts cited cutting pay in order to be able to keep employees on payrolls or recall furloughed workers. A few energy sector companies said they weren't cutting compensation but encouraging retirement among older, more costly workers. An airline reported plans to cut non-contract employees' salaries in absence of additional government support.
Input costs continued to increase at a moderate pace, in part due to supply-chain issues. The exception was in oilfield services where costs declined due to weak demand. Selling prices were flat to up slightly, with more marked increases reported in the construction and retail sectors. Contacts noted that pass-through of costs onto customers remained limited.
Manufacturing activity continued to recover, though at a slower pace than in the previous reporting period. Output rose with growth led by primary metals, fabricated metals, construction-related, and food product manufacturing. Several manufacturers, particularly those tied to the energy and the leisure and hospitality sectors, said demand remained below normal. Petroleum refiners noted a slight increase in utilization rates, and chemical production rose, but margins remained depressed due to weak demand and high inventories. Overall, outlooks among manufacturers remained positive, though uncertainty persists.
Growth in retail sales slowed during the reporting period. Some firms experiencing continued sluggish demand attributed it to weakness in the oil and gas sector and in tourist activity. Auto sales remained weak partly due to low inventories. Hardware store sales have been boosted by rising home renovation activity. Wholesalers of nondurable goods noted solid demand. Outlooks were somewhat optimistic, although political uncertainty arising from the election and increasing COVID-19 cases remain sources of concern.
Recovery in the nonfinancial services sector slowed following a surge in activity during the previous reporting period. However, activity in the information and professional and business services industries saw continued solid growth. Staffing firms noted a pickup in demand, particularly for healthcare, IT, online retail, and call center services; however, activity remained below year-ago levels. Air cargo volumes rose. Airlines saw modest growth in bookings. Leisure travel to outdoor vacation destinations continued to dominate bookings, while corporate travel remained nearly nonexistent. Outlooks among airline contacts remained weak and further reduction in capacity was expected. Activity in the leisure and hospitality sector remained sluggish, and a contact noted that a sizable share of hotel owners in Corpus Christi would only be able to survive another six months without government assistance. Nonprofit organizations continued to face challenges due to lack of funding.
In general, outlooks were marginally positive, with the resurgence of COVID-19 cases and political uncertainty continuing to weigh on sentiment.
Construction and Real Estate
Activity in the housing market remained robust. Home sales continued to outperform expectations, particularly in suburban locations, and inventories remained exceptionally tight. Builders said they were raising home prices both to cover higher construction costs and to slow down sales given the heavy backlogs. New home development was active, and contacts noted that builders and developers were chasing land and lots. Outlooks were positive, with some concern about the impact on future sales of rising COVID cases, tight lot supply, and a weak labor market.
Apartment demand held steady. Elevated supply continued to put downward pressure on apartment rents. Office leasing remained weak and sublease space rose as many firms continued to evaluate their space needs given that a sizeable share of their employees continued to work from home. Retail market conditions stayed fragile, while industrial demand remained strong driven by third party logistics and e-commerce activity. Investment sales have picked up for multifamily and industrial properties.
Overall loan volume dipped during the reporting period, with solid gains in residential real estate lending offset by declines in consumer and in commercial and industrial (C&I) loans. Loan pricing was competitive, and a few contacts voiced concerns about margin compression. Credit standards tightened, particularly for C&I and commercial real estate loans. Nonperforming loans rose over the past six weeks, and over half of the respondents expect an increase in delinquencies six months from now. Perceptions of general business activity and outlooks for loan demand stayed positive, though there were lingering concerns about political uncertainty, low net interest margins, and deteriorating asset quality.
The Eleventh District rig count rose over the reporting period. Well completions rose sharply as firms moved forward with bringing uncompleted wells into production. However, most contacts expect drilling and completion activity to level off soon and hold nearly flat through mid-2021. Contacts said that the recovery of oil consumption remained their primary near-term concern, although political uncertainty surrounding potential changes in the regulatory environment was particularly worrisome for smaller exploration and production and fracking-services firms.
Drought conditions intensified, particularly in the western part of the district. Contacts remained concerned about the La Niña weather pattern and a dry winter diminishing 2021 crop prospects. The harvest was wrapping up for 2020 row crops, and prices pushed above breakeven levels for most producers. The livestock sector was facing headwinds of lower cattle prices and higher feed costs. Contacts were more optimistic about the agricultural sector in general with stronger prices, solid export demand, and a more hopeful economic outlook.
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