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Eleventh District Beige Book

October 20, 2021

Summary of Economic Activity

Solid expansion continued in the Eleventh District economy, though COVID-19 and labor and supply-chain constraints remained headwinds. Growth in the manufacturing and nonfinancial services sectors was strong, and retail sales rose at an average pace. Home sales were steady at elevated levels. Overall loan volumes rose broadly, and the energy sector continued to experience robust growth. Agricultural conditions were quite strong. Employment growth was robust, and wage growth remained highly elevated amid widespread labor shortages. Notable price increases were seen across sectors, with contacts noting that ongoing supply-chain disruptions continued to drive up costs. Outlooks improved, with most contacts expecting stronger business six months from now, though uncertainty increased.

Employment and Wages

Employment expanded robustly overall, though job growth moderated slightly in the service sector. Hiring picked up in manufacturing, energy, and retail despite continued reports of difficulty finding workers. These labor shortages continued to pervade other industries as well, perhaps most acutely for entry-level workers. Numerous firms said restrained headcounts were hampering expansion plans or even the ability to meet current demand. Some contacts noted delays and difficulties in bringing workers back onsite, either due to the resurgence of COVID-19 or increased pushback from employees to remain remote. Some staffing services contacts expect recruiting to become easier in upcoming months now that federal unemployment benefit programs have ended.

Wage growth remained highly elevated, and numerous contacts said they were having difficulty filling vacancies even at much higher wages. Multiple contacts cited entry-level wage increases of 15 to 20 percent over the past six months.

Prices

Prices continued to rise strongly, with upward pressure on both input costs and selling prices holding near historically high levels. Input costs rose fastest in the manufacturing sector, followed by oil and gas support services and retail. Supply-chain bottlenecks were widely cited as a key factor driving up costs. Many contacts reported passing on at least a portion of the higher costs to customers, though some noted their profit margins continued to be pressured by selling price increases not matching cost increases. Contacts in the construction industry noted elevated but fairly stable input costs overall, with declining lumber costs offsetting rises in other materials. Looking ahead, most contacts expect elevated price increases to continue for at least the next six months.

Manufacturing

Robust expansion continued in the Texas manufacturing sector, though the vast majority of firms noted supply-chain disruptions or delays. In many cases these disruptions have been going on for a while, and firms have yet to see relief—nearly 90 percent say supply issues are the same or worse now versus a month prior. Despite these challenges, output growth was widespread across sectors, led by nondurable goods manufacturing, primarily food and chemicals. Optimism waned amid rising uncertainty and continued labor and supply-chain constraints, though a majority of contacts still expect higher output six months from now.

Retail Sales

Moderate sales growth continued in the retail sector. Growth was led by wholesalers, while auto dealers continued to report declining sales amid particularly acute supply-chain issues and tight inventories. Numerous contacts said transportation problems—a shortage of containers, trucks, and truck drivers—were exacerbating other supply-chain issues like limited product availability and extended lead times. Outlooks were slightly more bullish than six weeks ago, but retailers note it will take time to get out of the supply issues they are experiencing.

Nonfinancial Services

Texas service sector activity continued to grow at a slightly above-average pace, with revenue growth strongest among professional, scientific and technical services firms. Solid revenue growth was also seen in the health care sector after some weakness in prior months. Leisure and hospitality firms saw a decline in revenues over the reporting period, citing cancellations and slowed business due to the Delta variant. Staffing firms reported strong demand across industries, with particularly robust demand in healthcare, construction, and information technology. An airport said summer passenger volume in 2021 was more than double that of 2020, but down about 15 percent from summer 2019. The contact also noted that August domestic ecommerce air cargo volumes were higher than any August in the past 20 years, though international cargo volumes have yet to recover to pre-pandemic levels. Shipping cargo volumes at Texas ports also pushed to a record high in August, driven by increased consumer spending and retailers trying to build up inventory. Overall, outlooks remained strong with most firms expecting higher revenues six months from now, though uncertainty continued to creep higher.

Construction and Real Estate

Housing demand remained strong. Contacts noted that sales were levelling off at above-average levels, in part due to tight inventories, buyer hesitancy and declining affordability. Home price appreciation moderated, but land and lot prices continued to accelerate. Labor challenges and supply shortages remained widespread, resulting in delays in lot development and home closings. Builders' margins have widened, however, and outlooks were optimistic.

Apartment demand increased further, with leasing activity rising in both urban and suburban locations. Annual rent growth was at a record high in many Texas markets. For industrial properties, contacts noted robust growth in demand and construction. Net absorption of office space was mixed, but availability of sublease space and vacancies remained high, with little improvement expected in the near term. Activity in the retail space market was generally positive since the last report. Investment sales activity was elevated for industrial and multifamily properties.

Financial Services

Loan demand growth remained solid, pushing up overall loan volumes. Residential real estate loans led volume growth over the past six weeks, followed closely by commercial real estate, and commercial and industrial lending picked up notably from the prior period. Nonperforming loans continued to decrease, and credit standards and terms remained largely unchanged. According to financial industry contacts, general business activity continued to increase, though respondents cited concerns that supply-chain disruptions, labor shortages, and the Delta variant were disrupting businesses and increasing uncertainty. Outlooks for loan demand and broader business activity six months from now remained optimistic.

Energy

Elevated growth continued in the oil and gas sector. Optimism improved among contacts, spurred by higher oil and natural gas prices, though supply-chain problems continued to worsen. Contacts said current prices are conducive to increasing production, and drilling and well completion activity rose steadily over the past six weeks. Orders for new equipment were up, though availability is narrower, lead times longer, and prices higher. Looking ahead, contacts expect rising production and noted more upside risk than before.

Agriculture

Soil conditions remained mostly adequate in Texas, though drought conditions persisted in parts of southern New Mexico. Crop conditions were quite favorable, boosting expectations for substantially higher production this year than last across a variety of crops, including cotton, sorghum, and corn. Agricultural prices generally softened slightly over the reporting period. Pasture conditions were fair to good, and promising soil moisture conditions for the planting of winter wheat increased optimism for crop performance.

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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