Eleventh District Beige Book
March 3, 2021
Summary of Economic Activity
The Eleventh District economy expanded at a moderate pace, though output in most industries remained below normal levels. Growth in the manufacturing and nonfinancial services sectors picked up in early February after stalling in January, while retail activity remained flat. Unprecedented winter storms and widespread power outages in mid-February severely disrupted economic activity, though the impact is mostly expected to be transitory. The housing market continued to be a bright spot, with vigorous new home construction. Overall loan volume decreased slightly, though real estate lending continued to rise. Energy activity improved further. Employment rose and wages increased moderately. Marked price increases were seen in the manufacturing and retail sectors, due in part to supply chain disruptions. Outlooks were generally positive, but uncertainty persisted.
Employment and Wages
Employment was up overall, with solid hiring continuing in manufacturing and service-sector hiring picking up in February after easing in January. Employment reports were mixed in the energy sector, with some reporting lingering layoffs and others reporting hiring to meet needs for drilling and completion activity. Modest job losses were seen in the retail sector, where work hours also dipped. Some firms reported short-term problems maintaining workflow while others closed temporarily amid widespread power outages and water problems from winter storms. Roughly 47 percent of contacts say headcounts are down from pre-COVID levels, by about 25 percent on average, according to a Dallas Fed survey of over 300 Texas businesses in February. Twenty-one percent of firms reported increased headcounts, and 32 percent reported no change from February 2020 levels.
Wage growth was moderate, though there were some reports of more significant wage pressure in segments experiencing difficulty finding and retaining workers. An investment firm said they had to increase wages 5–15 percent to keep employees from being lured away. Several contacts voiced concern over the prospect of a $15 minimum wage.
Input costs continued to increase at a moderate pace overall, except in the manufacturing and retail sectors where supply chain disruptions drove prices up more strongly. Some contacts also noted substantial increases in agricultural commodity prices, as well as lumber and steel. Selling prices were flat to up slightly outside of the retail and manufacturing sectors where above-average price growth was seen. A wholesaler noted that cost increases were happening so fast that they could not raise prices fast enough to keep up, and margins were suffering as a result.
The Texas manufacturing recovery slowed dramatically in January but picked up pace in early February, with production and demand growth accelerating markedly. February growth was widespread and led by nondurables, particularly food and chemicals. Petrochemical contacts noted strong demand for consumer packaging, PPE, and construction materials like PVC. Refineries said fuel demand was decent over the past six weeks but still down year over year. A majority of manufacturers noted supply chain shortages were disrupting business, as was worker absenteeism due to COVID-19 quarantines. The full impact of the mid-February winter storms is not yet known, but some contacts reported temporary facility shutdowns. Outlooks improved further, though some contacts voiced concern about the prospect of adverse effects resulting from increased oil and gas regulation.
Texas retail activity remained fairly flat over the past six weeks. Auto sales were weak, in part from low new vehicle inventories due to supplier issues. Demand for building materials was booming, but sales growth was limited by supply constraints. Overall, more than 60 percent of retail contacts said they were experiencing supply chain disruptions, which they noted were driving up costs and delaying order fulfillment. Severe winter storms in mid-February depressed sales activity, and outlooks worsened overall.
Growth in the nonfinancial services sector stalled out in January amid rising COVID-19 cases but resumed at a modest pace in early February. Despite the ongoing recovery, more than half of contacts report that revenues were still down from normal, though this share has slowly but steadily declined over the past eight months. Professional and technical services continued to outperform other segments, with generally robust revenue growth. Staffing firms reported increased demand as business among customers broadly recovered, with particular strength in healthcare, IT, and construction. In transportation services, air cargo volumes were up over the past six weeks with growth driven by e-commerce, while small parcel volumes were down seasonally but well above year ago levels. Airlines reported flat demand at low levels.
Severe winter storms and power outages in mid-February significantly and adversely impacted many businesses in the short term, but overall outlooks improved, with some contacts pointing to the COVID-19 vaccine as a particular driver of optimism.
Construction and Real Estate
Activity in the single-family housing market remained robust. New home construction continued to be vigorous, though there were reports of delays due to increased lead times for building materials and appliances, skilled labor shortages, and permitting delays. As a result of these production constraints, several builders noted capping sales and putting prospective buyers on wait lists. Lot supply remained very tight, and one contact said buyers camped out for lot selection at a subdivision in suburban Austin. Builders continued to increase prices to offset rising construction costs, particularly for lumber, and to slow down sales as backlogs remained high. Outlooks were favorable, with some concern about tight lot supply, labor and material availability and costs, and an unexpected rise in mortgage rates.
Apartment demand was mostly steady, and rent collections were generally holding up in major Texas markets. Industrial construction and leasing activity remained strong. Office leasing stayed weak, but contacts said market conditions appeared to be slowly stabilizing.
Overall loan volume decreased slightly over the past six weeks, with increases in commercial and residential real estate loans offset by declines in consumer loans and commercial and industrial loans. Loan pricing continued to decline, and credit standards tightened further. General business activity increased, and contacts expect higher loan demand and general business activity six months from now.
In a Dallas Fed survey of more than 70 Eleventh District financial Institutions, 80 percent were issuing loans through the current round of PPP, though the majority expect the total number and total value of these loans to be substantially lower than the PPP loans they issued last year.
Activity in the oil and gas sector improved somewhat, and sentiment was very cautiously optimistic. Drilling and completion activity were more robust than contacts had expected. The number of new executive orders aimed at the oil and gas industry was concerning to some contacts. Many smaller firms that operate on federal lands will not be able to shift to private lands, but most mid-sized and larger firms will. The lack of permitting and leasing in the Gulf of Mexico, if sustained, could be a more significant issue. The looming threat of tighter federal regulations and depressed global demand weighed on contacts' minds, but improving COVID-19 statistics, OPEC production discipline, and higher oil prices were tailwinds.
Precipitation over the reporting period eased drought conditions somewhat. Higher crop prices boosted optimism among farmers heading into spring planting, though there was some concern over higher input costs. The extent of the losses from the severe winter storms are not yet known, but will likely span the livestock and dairy sectors, produce, and wheat.
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