Eleventh District Beige Book
September 8, 2021
Summary of economic activity
Solid expansion continued in the Eleventh District economy, though surging COVID-19 cases has added uncertainty to outlooks. Growth in the manufacturing and nonfinancial services sectors remained strong, and retail sales rose in August after holding steady in recent months. Home sales remained solid but eased. Overall loan volumes rose broadly, led by commercial real estate lending. Energy activity rose steadily, and agricultural conditions were very strong. Employment growth was robust, and wage growth remained elevated amid widespread labor shortages. Ongoing supply chain disruptions continued to drive up prices, though pressures eased slightly over the reporting period. Outlooks improved, though uncertainty increased.
Employment and wages
Employment expanded robustly overall, with a marked pickup in service sector job growth. Retail employment was mostly flat. Difficulty hiring remained widespread across skill levels and was quite severe for many contacts, particularly small businesses. A Dallas Fed survey of more than 350 Texas businesses showed that about 70 percent were trying to hire in August, and the vast majority named a lack of applicants as an impediment. Staffing shortages were particularly acute in health care and especially among nurses, exacerbated by the recent surge in COVID-19 cases. Hospitals also reported a lack of a large-scale return of applicants for low-wage positions, despite the end of federal unemployment benefits.
Wage growth remained elevated, and numerous contacts noted significant wage pressure to attract and retain employees. Among firms trying to hire, about half said a key impediment was applicants looking for higher pay than what was being offered. Energy industry contacts reported substantial pressure on wages and benefits, with some firms increasing wages as much as 15 to 20 percent to keep workers from defecting to competitors or adjacent industries.
Prices continued to rise, albeit at a slightly slower pace in July and August than in June. Rising input prices continued to outpace selling price growth, compressing margins. Input costs rose particularly fast in the manufacturing sector, where supply chain disruptions were widespread. Contacts noted unprecedented increases in steel and aluminum prices, and others noted that material cost increases were happening more frequently than before. Construction materials were also seeing sizeable price increases, though builders noted some reprieve in lumber costs. Looking ahead, expectations for future cost increases abated slightly in the service sector but picked up among manufacturers.
Texas factory activity continued to expand at an above-average pace in July and August. Growth was led by nondurables manufacturing, particularly food. Refiners saw increased demand as motor fuel consumption rose seasonally but noted that margins were still muted. Petrochemical firms reported strong demand, with one noting record earnings. Many contacts noted persistent materials shortages and extended lead times. Nearly three-fourths of manufacturers said supply chain disruptions were restraining their revenues, according to a Dallas Fed survey of 90 manufacturing executives. Labor availability issues also hampered firms' ability to meet orders. Overall, outlooks among manufacturers remained optimistic, though the Delta variant and surging COVID-19 cases were driving up uncertainty.
Retail sales were fairly flat in July but rose in August, despite widespread supply chain issues and tight inventories, particularly among auto dealers. A Dallas Fed survey of 42 Texas retailers showed that nearly three-fourths of respondents cited supply chain disruptions as a primary factor restraining revenues. Outlooks were mildly positive, though uncertainty continued to increase.
Broad-based, solid expansion continued in nonfinancial services. Growth was led by transportation services. Airlines said air travel continued to surge in July and in early August, boosted by pent-up demand for leisure travel, but has eased more recently, driven by rapidly rising Delta-variant infections, seasonality, and a delay in the return of business travel. Cargo tonnage through Texas seaports set new records in July, as businesses worked to build up inventory amid elevated levels of consumer demand and persistent supply chain disruptions. Staffing firms report slightly slower growth, with some contacts pointing to uncertainty caused by the Delta variant as a contributing factor to the deceleration. Leisure and hospitality firms noted revenues rose in July but were fairly flat in August, and restaurants said worker shortages were constraining operations. Overall, outlooks were positive, though less optimistic in August than in prior periods as the surging Delta variant, persistent labor and supply shortages, and rising costs are expected to dampen the economic recovery. Previous forecasts for a strong return of business travel and events this fall have been adjusted downward by the pandemic resurgence.
Construction and real estate
Activity in the single-family housing market moderated during the reporting period. Sales were still generally solid but not as frothy as they had been earlier in the year, partly due to seasonality. Several builders were no longer capping sales, and some cited reintroducing incentives or slight discounting. Construction backlogs remained large, and completion times were elongated due to labor challenges and supply shortages for items like windows, bricks, and appliances. Home prices have begun to stabilize. Outlooks were generally positive.
Apartment leasing activity remained solid, strengthening occupancy and rents. Buyer interest in multifamily properties was near record highs. Activity in the industrial market was still booming. Demand for office space continued to languish due to the fallout from work-from-home policies, and contacts do not expect much improvement in the near term.
Loan demand continued to increase at a robust pace, pushing up overall loan volumes. Commercial real estate lending continued to lead growth, while growth in commercial and industrial lending abated over the last six weeks. Nonperforming loans continued to decrease and credit standards remained largely unchanged. Loan pricing remained competitive, with multiple respondents citing concerns regarding too much liquidity and margin compression. Outlooks remained optimistic, though less so than the previous reporting period. Multiple bankers expressed concern that the Delta variant could slow spending and growth.
Drilling and completion activity rose steadily over the past six weeks. Orders for new equipment were up. Contacts generally felt that current oil and gas prices are sufficient for producers to meet capital expenditures goals and even slightly grow production. Optimism among contacts was largely unchanged, and most contacts discounted the impact of the current surge in COVID-19 on the demand outlook.
Texas was nearly drought free by the end of the reporting period, though drought conditions persisted in New Mexico. Sufficient soil moisture boosted crop conditions for wheat and row crops alike, allowing many producers to reap strong yields. Preliminary reports point to higher production this year versus last year for Texas' major crops—cotton, sorghum, corn and soybeans. Crop prices remained strong, supporting profitability. Rising production costs are a concern going forward, but outlooks were generally optimistic. In the livestock sector, pasture conditions were favorable, and prices rose for cattle and poultry.
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