Eleventh District Beige Book
June 2, 2021
Summary of economic activity
The Eleventh District economy continued to expand at a solid pace during the reporting period. Growth in the manufacturing and nonfinancial services sectors was strong, though activity remained below pre-pandemic levels. Retail sales were mixed. Home sales and single-family construction remained robust, but activity was being constrained by labor, lot, and materials shortages. Apartment demand rose, while office leasing stayed weak. Overall loan volume increased sharply, buoyed by continued strength in real estate lending. Energy activity and agricultural conditions improved. Employment growth was moderate, and upward wage pressures continued as hiring remained a key challenge for many companies. Ongoing supply chain disruptions intensified price pressures, particularly in the construction and manufacturing sectors. Outlooks improved, though there was widespread apprehension about the sustainability of current demand growth in light of supply constraints, difficulty hiring, and rising costs.
Employment and wages
Employment expanded at a moderate pace. Lack of labor availability, particularly for low-skilled positions, was a growing concern among firms trying to hire or recall workers, with a majority noting a lack of applicants and generous unemployment benefits as impediments to hiring. Many contacts, particularly accommodation and food service firms, reported sizable numbers of unfilled positions, and some noted that existing staff have had to take on responsibilities outside of their normal jobs. Some firms noted difficulties getting applicants to show up for interviews, which further hampered hiring.
Wages continued to increase, with reports of significant upward pressure in industries having trouble finding and retaining workers. There were multiple reports of considerable wage pressures for mechanics, warehouse employees, construction specialty trades, and truck drivers. A manufacturer said that even with a starting hourly wage of $14 for non-skilled workers, they were unable fill 20-plus open positions.
Price pressures intensified further in part due to persistent supply chain issues, and multiple firms noted that this was affecting business growth. Input costs surged, with contacts in the construction, manufacturing, and retail sectors citing the steepest increases. There were several reports of higher prices of fuel, petrochemicals, agricultural commodities, building materials, lumber, metals, and vehicles, as well as rising freight costs. Some contacts expect costs to remain elevated for some time due to strong demand and/or supply chain challenges. Selling prices rose at a fast clip in many sectors. Housing contacts noted difficulty obtaining appraisals due to rapid escalation in home prices. Compared to yearend 2020, business contacts have revised upward their expectations for input and selling price increases in 2021.
Solid expansion continued in the manufacturing sector, though the pace of growth eased from the prior reporting period. Several durable goods manufacturers noted large backorders and a lack of capacity to keep up with strong demand. Those noting slower activity said supply chain issues combined with inventory or raw materials shortages led to slowdowns in production schedules. Refining operations were recovering from the disruption caused by the Colonial pipeline outage, and contacts were increasingly optimistic for strong U.S. fuel demand in the third quarter. Margins are expected to rise in the second half of the year to near 2019 levels. Petrochemical production has mostly recovered from Winter Storm Uri outages, but supply chain disruptions were likely to persist through yearend 2021. Overall outlooks improved, although some manufacturers voiced concern about the dampening effect on activity of supply constraints, extended lead times, and proposed tax hikes.
Retail sales grew robustly in April but dipped in May, which contacts attributed to supply chain issues and low inventories. Auto sales expanded as well during the reporting period, though new car supplies were limited by microchip shortages. Outlooks were positive, buoyed by the reopening of the economy and current pace of vaccinations, though rising costs and inventory shortages remained a concern.
Nonfinancial services expanded strongly over the reporting period. Demand growth was broad based, led by increases in leisure and hospitality, transportation, and professional and business services. Restaurateurs and hoteliers said leisure activity was largely driving demand as business travel remained sluggish. Airlines also cited modest increases in ticket sales, which they attributed to improvement in COVID statistics and easing restrictions. Leisure travel continued to dominate airline bookings, and contacts noted a pickup in reservations a few months out. Staffing firms reported broad-based increases in demand. In transportation services, air cargo volumes rose sharply due to continued strength in domestic e-commerce activity. Container shipments coming through the Port of Houston picked up, and small parcel shipments increased as well. Outlooks were positive, although there was apprehension regarding the sustainability of current demand growth along with proposed changes in tax policies among other regulations.
Construction and real estate
Activity in the single-family housing market remained brisk. Sales continued to be robust, though builders were struggling to keep up with demand and had to limit sales. Several builders are shifting away from build-to-suit construction to only starting inventory homes and selling them at the framing or drywall stage due to production challenges and escalating costs. In fact, in some instances, builders were selling lots and/or inventory homes to the highest bidder. Others who were still doing build-to-suit jobs noted including price escalation clauses in contracts to cover cost increases incurred during the construction phase. Lot supply remained very tight as did existing and finished vacant home inventories. In the existing-home market, realtors reported bidding wars on listings and homes getting snapped up quickly. Outlooks were mixed, with contacts voicing concern about constrained lot supply, appraisal issues, rising costs, and labor and material shortages.
Apartment demand was solid, pushing up occupancy and rents. Apartment construction was ramping back up after a slowdown last year due to COVID. Contacts said that there is a lot of money chasing multifamily deals and pricing on assets is quite aggressive. Industrial construction and leasing remained robust. Demand for office space remained weak and vacancies ticked up further.
Loan volumes rose robustly over the past six weeks supported by continued strength in commercial and residential real estate activity. Commercial and industrial loan volumes ticked up, while consumer lending was flat. Nonperforming loans declined, and credit standards stayed somewhat tight. Loan pricing remained competitive, and multiple contacts said they were flush with liquidity and that it was difficult to deploy the excess capital to generate reasonable returns. Sentiment regarding general business activity improved markedly, with 68 percent of respondents citing an increase over the past six weeks. Outlooks were optimistic, with contacts expecting continued declines in non-performing loans, strong loan demand, and increased general business activity six months from now. Nearly half of respondents also noted that they expect long-term rates to rise over the next 12 months.
Drilling and completion activity rose further during the reporting period. Oilfield services firms noted modest hiring to support increased oil field activity. Exploration and production firms expect the market to support a West Texas Intermediate price of $60-65, and reiterated that, at this price, capital spending plans would likely remain unchanged among large U.S. producers. E&P firms have slightly revised up their production outlook for 2021 thanks to strong year-to-date results. Sentiment in the oil and gas industry improved further, though contacts remained cautious about changes in tax policy and rising fuel, materials, and labor costs.
Recent rainfall eased drought conditions in parts of the District and improved prospects for row crops. Agricultural commodity prices moved higher across the board, spurred by tight world supply and robust export demand. Overall, row crop farmers were optimistic for improved production and revenues this year. Significantly higher grain prices, however, have negatively affected the livestock sector with feed costs double what they were a year ago. Beef exports were strong, which together with continued capacity constraints in meat packing plants have driven up beef prices to well-above-average levels.
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