Eleventh District Beige Book
January 13, 2021
Summary of Economic Activity
The Eleventh District economy expanded at a moderate pace, but activity in most industries remained below normal levels. Recovery in the manufacturing and service sectors picked up, while retail activity remained weak. The housing market continued to be a bright spot, with robust home sales and strengthening apartment demand. Overall loan volume increased, led by real estate lending. Energy activity showed mounting signs of improvement after a prolonged contraction. Employment rose moderately, though wage growth remained subdued. Input cost increases continued to outpace growth in selling prices. Outlooks were generally positive, but uncertainty remained high. Several contacts voiced concern about rising COVID-19 infection rates impacting their short-term business prospects, though there was optimism about the vaccine paving the way to a resumption of more normal activity this year.
Employment and Wages
Employment rose moderately overall. Hiring was most robust in the manufacturing sector but also picked up in the service sector after stalling out in the prior period. Several contacts noted hiring freezes and, among those adding to payrolls, there were scattered reports of recruiting difficulty. Layoffs continued in the energy sector, although they abated somewhat. Energy contacts said more layoffs and early retirements were in the works, but the worst is past despite mounting bankruptcies. Outside the energy sector, just over half of Texas businesses surveyed expect to add to headcounts in 2021, while 38 percent expect to keep employment levels flat and 10 percent expect declines. Airline contacts noted the new COVID-19 relief bill would likely prevent further layoffs in the first quarter.
Wage growth remained subdued, except in manufacturing where it picked up after a nine-month slump. Still, several service sector contacts noted implementing bonuses or increased wages, with an accommodations firm citing the increasing minimum wages in California and Florida contributing to their decision. Looking ahead, most firms expect wage growth in 2021 to be well above what was seen in 2020.
Input costs continued to increase at a moderate pace overall, though retailers saw more substantial rises and several manufacturers noted sharply increased raw materials prices, particularly steel. Selling prices were flat to up slightly, with more marked increases reported in the retail and manufacturing sectors. While contacts overall noted subdued growth in selling prices in 2020, most expect a rebound to average or above-average selling price growth this year.
The Texas manufacturing recovery gathered steam in December, with production and demand growth accelerating from November. Growth was widespread and led by nondurables, particularly petrochemical products. Petrochemical contacts noted healthy demand for PVC, driven by construction, and very strong plastic packaging demand. The pandemic remained a drag on business overall, with nearly half of manufacturers saying revenues were still below normal. The vast majority expect 2021 revenues to be stronger than last year, with growth peaking in the third quarter. Outlooks among manufacturers pushed further positive, despite considerable uncertainty.
Texas retail activity was flat in December following a decline in November. Auto sales picked up, though contacts voiced concern that rising COVID-19 infections could negatively impact buying activity. A Dallas Fed survey of about 50 Texas retailers showed that a nearly equal share—about 30 percent—expect revenue to decrease in the first quarter versus increase, but that by the second quarter the share expecting a decrease falls to 17 percent while the share expecting an increase grows to 53 percent. Overall, well over half of retail firms expect 2021 revenues to exceed 2020 levels.
Growth in the nonfinancial services sector resumed but remained muted as rising COVID-19 cases restrained demand. Continued contraction was seen in leisure and hospitality. In transportation services, cargo volumes through Texas ports and via small parcel delivery services were up quite strongly, and much of the leftover passenger air capacity was used to move freight air cargo. Airlines noted that increasing COVID-19 cases were impacting leisure air travel and that despite a seasonal pickup in passenger demand, airline bookings remained well below year-ago levels. Business air travel continued to be virtually nonexistent. Recovery continued, however, among professional and business services firms, with revenue growth accelerating in December. Staffing services firms said demand was broad-based and had increased drastically over the last couple of months.
Looking ahead, a majority of businesses expect 2021 revenues to exceed 2020 levels, by about 30 percent on average. Even still, a sizeable share expects flat or reduced revenue this year. Overall, outlooks remained marginally positive, with many contacts pointing to the COVID-19 vaccine as a particular driver of optimism.
Construction and Real Estate
Home sales remained solid during the reporting period. Several contacts noted seasonal softness; however, sales were up year over year. Builders said they continued to push up prices, and a few noted solid margins. New home development remained vigorous, though there were continued reports of supply chain issues and skilled labor shortages. Outlooks were favorable, with continued concern about political uncertainty and a weak labor market negatively impacting future sales.
Apartment demand in the fourth quarter was better than expected. Nevertheless, demand lagged completions, putting downward pressure on occupancy and rents. There was slight deterioration in apartment rent payments in December. Office leasing stayed weak and contacts noted concern about the growing amount of sublease space. The industrial market continued to perform remarkably well.
Overall loan volume increased modestly over the reporting period, with declines in consumer and commercial and industrial (C&I) loans offset by increases in residential and commercial real estate loans. Loan pricing continued to decrease, and some contacts voiced concerns about margin compression. Credit standards tightened further, particularly for C&I loans. Nonperforming loans rose over the past six weeks, though at a markedly slower rate than what was seen in mid-2020. While assessments of current general business activity remained mixed, nearly 70 percent of contacts expect an increase in business activity six months from now.
The rebound in the energy sector solidified further over the reporting period, though the level of activity remained below year-ago levels. The Eleventh District rig count rose markedly, and drilling and well completion activity continued to improve. Contacts on both the exploration and production side and the oilfield services side reported stronger levels of business activity for the first time since the onset of the COVID-19 pandemic, and oil production stabilized after several months of decline. Outlooks generally improved, though rising COVID-19 cases and the prospect of tighter regulations weighed on contacts' sentiment about future activity.
Drought conditions intensified further, particularly in the western part of the District. Demand for agricultural products remained solid. Crop and cattle prices rose over the past six weeks, though cheese prices fell dramatically. Higher crop prices boosted sentiment, as current levels are profitable for many producers given normal yields.
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