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Eleventh District Beige Book

July 14, 2021

Summary of Economic Activity

Solid expansion continued in the Eleventh District economy. Growth in the manufacturing and nonfinancial services sectors was strong, though activity remained somewhat below pre-pandemic levels. Retail sales dipped as supply chain issues hampered activity. Home sales remained elevated, but buyer traffic and interest cooled off slightly. Apartment demand surged, pushing up rents. Retail leasing picked up, while office demand stayed weak. Overall loan volumes rose broadly. Energy activity and agricultural conditions saw moderate improvement. Employment growth was moderate, and upward wage pressures increased with labor shortages being a significant issue for many firms. Ongoing supply chain disruptions intensified price pressures. Outlooks improved, though uncertainty increased, and a much larger share of respondents was experiencing supply chain challenges compared with earlier in the year.

Employment and Wages

Payrolls expanded moderately outside of the retail sector, where employment was flat. Lack of labor availability, particularly for low and mid-skill positions, was a mounting concern among companies looking to hire, and many noted that this was slowing activity and/or expansion plans. Staffing firms noted stiff competition for recruiters and reported having many more positions to fill than qualified candidates to match. One staffing contact noted candidates were filling in applications with little or no intention of showing up for an interview. A few respondents expect some relief in labor challenges given the recent expiration of federal supplemental unemployment benefits in Texas.

Wage growth accelerated, and there were widespread reports of upward wage pressures across industries, including airlines and energy. A manufacturer said that even with a $500 signing bonus and $15 per hour starting pay for untrained workers, they were not getting applicants. An education services firm reported increasing entry-level labor compensation by 20 percent. A small coffeeshop owner cited offering signing bonuses and a $1,000 referral for a barista willing to stay on for three months.

Prices

Price pressures accelerated further due to growing supply chain issues. A Dallas Fed survey of 382 Texas business illustrated that a majority of respondents were experiencing supply chain challenges, and among them 60 percent noted conditions had worsened over the past month. Input costs surged, with contacts in the construction, manufacturing, and retail sectors citing the steepest increases. There was continued concern among respondents regarding higher prices of fuel, agricultural commodities, building materials, metals, and motor vehicles. Several contacts, particularly manufacturing firms, noted that they were passing on higher costs with more ease than in the past, though some cannot pass them through which is negatively impacting margins. Selling prices rose at a fast clip in many sectors, and even airlines reported raising fares. Housing contacts noted continued difficulty obtaining appraisals reflective of the final sales price.

Manufacturing

Texas factory activity gained momentum in June, with output growth accelerating broadly. Several manufacturers noted increasing demand and growing backlogs. Those citing slower activity mostly said supply chain and labor availability issues hampered their ability to meet orders. Refining operations improved further, though utilization rates remained below 2019 levels. Refiners cited strong seasonal demand but noted that margins were still weak. Contacts expect significant improvement in margins in 2022. Petrochemical production has mostly recovered from Winter Storm Uri, though some basic chemical production was still hampered by a combination of maintenance and outages. Supply chain disruptions were likely to take longer to clear up than anticipated at the time of the previous report. Manufacturing outlooks were optimistic but labor shortages, inflationary pressures, and uncertainty regarding when supply disruptions would be resolved weighed on sentiment.

Retail Sales

Retail sales fell during the reporting period as supply chain issues and tight inventories continued to constrain sales activity, particularly auto sales. A Dallas Fed survey of 47 Texas retailers showed that 87 percent of respondents were experiencing supply chain challenges, and among them 61 percent noted that conditions had worsened over the past month. Multiple auto dealers said that vehicle inventories were at all-time lows, negatively impacting their bottom line. Outlooks were mildly positive, though uncertainty increased due to long lead times, inventory shortages, and shipping challenges.

Nonfinancial Services

Broad-based, solid expansion continued in nonfinancial services, though the pace of growth eased since the last report. Most accommodation and food services firms saw flat to higher revenues, and several contacts noted that the inability to fill open positions was holding back growth. Airlines said passenger demand and bookings surged, exceeding expectations. The acceleration was largely driven by domestic leisure travel and travel to nearby international tourist destinations, however, corporate demand ticked up as well. Most staffing firms reported broad-based increases in demand, ranging from healthcare to construction and hospitality workers, and a continued recovery in business. In transportation services, small parcel shipments rose, and air cargo volumes were flat to down, with demand largely domestic. Container cargo coming through the Port of Houston saw double-digit increases in May. Outlooks were positive, though uncertainty surrounding inflation, supply shortages, labor constraints, and the general business climate slightly increased.

Construction and Real Estate

Activity in the single-family housing market remained hot but cooled off slightly during the reporting period. Sales continued to be robust because of a deep buyer pool, though traffic was off a bit and customers were slower to make buying decisions due to elevated prices. Contacts also noted a slight reduction in waitlists and some push back from buyers on pricing. Builders continued to limit sales due to production challenges, tight lot supply, and escalating costs. Outlooks were mixed, with contacts voicing concern about constrained lot supply, appraisal issues, rising costs, and labor and material shortages.

Apartment demand soared, raising occupancy and rents. Absorption in suburban locations remained robust but activity in the urban core has improved as well. Contacts expect rent growth to remain generally solid through 2022. One contact noted that given the recent price inflation in construction costs, it is becoming difficult to profitably begin new multifamily deals. Industrial construction and leasing remained exceptionally strong. Demand for office space continued to be sluggish and vacancies ticked up further. Retail leasing has picked up, though activity remains below normal.

Financial Services

Loan demand continued to expand at a robust pace, pushing up overall loan volumes. Strength in commercial real estate activity led growth, but residential real estate, commercial and industrial, and consumer lending also increased. Nonperforming loans continued to dip, and credit standards remained largely unchanged. Loan pricing remained competitive, with multiple respondents citing concerns regarding too much liquidity chasing deals and/or margin compression. Sentiment regarding general business activity improved markedly, with eighty percent of respondents reporting an improvement. Outlooks stayed optimistic.

Energy

Drilling and completion activity expanded moderately, and oilfield services firms noted difficulty hiring to support increased oil field activity. Exploration and production firms expect the market to support a West Texas Intermediate price near $70 in the second half of the year, and reiterated that, at this price, capital spending plans would likely be little changed among large U.S. producers. E&P firms have slightly revised up their production outlook for this and next year due to strong year-to-date results and a higher oil price forecast for 2022. Sentiment in the oil and gas industry continued to improve, though contacts remained cautious about tax policy changes and rising materials and labor costs.

Agriculture

Drought conditions eased in much of the District, though severe drought persisted in West Texas and Southern New Mexico. In areas with sufficient soil moisture, producers were optimistic for robust crops this year. Crop prices were slightly higher overall, supported by concern over U.S. and global drought conditions. For crops like corn and sorghum, cash prices are at an eight-year high. Recent rainfall benefitted pasture conditions, which is a positive for livestock producers amid high feed costs.

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

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