Eleventh District Beige Book
December 1, 2021
Summary of economic activity
Robust expansion continued in the Eleventh District economy, with gains generally broad based across sectors. Growth in the manufacturing and nonfinancial services sectors stayed strong, though retail sales were mixed. Home sales and single-family construction remained elevated; however, activity was being constrained by labor, lot, and materials shortages. Apartment demand rose, and office leasing ticked up as well. Loan volumes rose broadly. The energy and agricultural sectors saw continued expansion. Employment rose robustly, and wage growth remained elevated due to widespread labor shortages. Supply-chain bottlenecks continued to drive up costs and prices rose. Outlooks improved though uncertainty surrounding labor and supply-chain challenges increased.
Employment and wages
Employment expanded robustly. Hiring picked up in construction, manufacturing, and services despite persistent reports of labor shortages and a growing number of job openings. Several firms noted worsening issues with retention and hiring, with some noting having to terminate contracts or turn away business due to lack of capacity. While finding low-skill workers remained the most challenging, filling mid and high-skill positions was becoming increasingly difficult as well. One contact said that competition for tech workers was being further exacerbated by non-local companies looking for remote workers in cities like Austin. Some firms voiced concern that the vaccine mandate would make hiring more challenging in an already tight labor market.
Wage growth remained highly elevated, and numerous contacts noted continued difficulty retaining workers and filling vacancies even at much higher wages. An airline reported offering flight attendants triple pay to work during peak periods over the coming holiday season. A parcel shipping firm cited staffing issues despite having increased hourly pay by 16-25 percent for package handlers.
Upward pressure on input and selling prices remained at historically high levels, with several contacts noting that persistent changes in pricing was posing a challenge in planning for the future. Input costs rose broadly, led by increases in the manufacturing sector. Supply-chain constraints continued to be widely cited as a key factor driving up costs, with some firms reporting continued double-digit increases in the price of raw materials. There were several reports of rising freight costs. While most respondents in the retail, manufacturing, and construction sectors were able to pass on some portion of the higher costs to customers, numerous service firms reported holding prices steady and a few noted losing customers due to price hikes. Airlines said that leisure travel fares eclipsed pre-pandemic levels during summer, but weak business travel is a drag on overall fares. A few staffing firms anticipate reducing their markups for certain clients as a result of the sharp increase in wages.
Robust expansion continued in the Texas manufacturing sector. Output growth was elevated and broad based across sectors, led by durable goods manufacturing. Supply-chain disruptions or delays remained widespread, with many firms noting that the inability to secure raw materials was affecting their ability to meet demand. Several respondents said orders that would typically take weeks to fill were now taking months. Refiners cited higher utilization rates, and chemical manufacturers said that production had fully recovered from the impact of Hurricane Ida. Chemical margins slipped slightly but remained at healthy levels. Manufacturing outlooks were positive though uncertainty edged higher due to supply-chain constraints.
Retail sales dipped in October but rebounded modestly in November. Growth was mixed across industries, with auto dealers continuing to report declining sales amid ongoing supply-chain issues and extremely tight used and new vehicle inventories. Retailers noted margin pressure due to rising costs. Outlooks were flat as supply-chain challenges weighed on sentiment.
Texas service sector activity continued to expand at a solid pace. Revenue growth was broad-based, with strong increases seen in the transportation and warehousing, administrative support services, and accommodation and food services sectors. Staffing firms saw broad-based strength in demand and noted that job orders had surpassed pre-pandemic levels. In transportation services, a parcel shipping company cited rising shipments and record delivery volumes in September. Container activity at Texas ports experienced double-digit growth year-over-year in September, driven largely by increased consumer spending. There were reports of port congestion, with wait times for ships averaging around 60 hours. The slowdown at the ports was being made worse by a truck driver shortage and a lack of trucks to haul containers. Airlines said air travel picked up during the reporting period following a deceleration in August and September that was driven by the surge in Delta-variant infections. Holiday bookings were coming in quite strong, though overall demand for air travel is expected to be choppy through spring 2022. Service sector contacts cited rising prices, lengthening wait times, and greater regulatory risk as potential headwinds for future growth.
Construction and real estate
Home sales held steady at above-average levels, though demand has softened relative to the highly elevated levels seen in spring and early summer. Construction capacity remained extremely constrained, resulting in lengthy delays in both lot development and home closings. Home inventories remained low and lot supply tightened further, nearing record lows in some areas. Builders' margins have widened, and outlooks were optimistic though there is widespread concern about lot supply and labor and material shortages.
Apartment demand rose further. Occupancy surpassed pre-pandemic levels, and rents continued their upward trend, with annual growth at or near record highs in most District metros. Demand for retail space was steady since the last report. Office leasing activity picked up, but vacancies remained high, with little improvement expected through yearend. For industrial properties, e-commerce activity continued to drive robust growth in demand and construction, with Dallas–Fort Worth ranking among the top U.S. markets in both metrics.
Loan demand picked up over the past six weeks, bolstering loan volumes. Commercial real estate lending led volume growth, eclipsing residential real estate lending, which continued to expand but at a decelerated pace. Volumes were largely unchanged for commercial and industrial loans and edged down for consumer loans. Nonperforming loans continued to decrease, and credit standards and terms remained unchanged. General business activity increased further, though contacts expressed concern over supply-chain disruptions, labor shortages, and inflation. Outlooks for loan demand and broader business activity six months from now remained optimistic, though contacts were less bullish on profitability.
Oilfield activity rose steadily over the past six weeks. Optimism remained high among upstream contacts, boosted by high oil and natural gas prices. However, supply-chain delays worsened, with significantly larger backlogs, escalating costs, and material and equipment lead times as long as 10 months for some types of machinery. Access to capital was slowly improving, but firms did not expect this to alter drilling plans. Looking ahead, contacts anticipate a moderate increase in production and improved margins.
Overall, the agricultural sector was doing quite well. Soil moisture remained mostly favorable, though some areas have begun getting dry over the past six weeks. Harvesting continued and production was strong, particularly for cotton and soybeans, far outstripping last year's numbers. Solid agricultural prices combined with high yields have boosted many farmers' financial positions this year. Contacts voiced concern going forward over higher input costs—fuel, fertilizer, machinery, etc.—and there were scattered reports of difficulty sourcing herbicides. On the livestock side, cattle prices rose, bolstered by solid beef demand.
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