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Eleventh District Beige Book

January 12, 2022

Summary of Economic Activity

Robust expansion continued in the Eleventh District economy, with gains broad based across sectors. Growth in the manufacturing, nonfinancial services, and retail sectors stayed strong, and growth in financial services picked up. Home sales remained elevated, though construction capacity continued to be highly constrained. Solid apartment leasing continued. The energy sector saw further expansion, while drought dampened agricultural conditions. Employment rose robustly, and wage growth remained highly elevated due to widespread labor shortages. Supply-chain bottlenecks continued to drive up costs, and prices rose at a rapid clip. Outlooks improved overall, though uncertainty increased amid a new surge in COVID-19 cases and concern that labor market tightness and supply-chain disruptions will persist well into 2022.

Employment and Wages

Employment continued to expand robustly. Job gains were widespread across services, manufacturing, energy and construction, even amid reports of a dearth of applicants and acute hiring difficulty. A manufacturer noted extreme new-worker turnover, saying three to five hires were needed for even one to stay on. Labor shortages were the top challenge in the healthcare industry, according to contacts. However, a large transportation services firm said they recently received a surge of applicants and were able to reach appropriate staffing levels. There were a few mentions of concern that vaccine mandates would further exacerbate labor issues, largely among oilfield contacts.

Wage growth remained at or near record highs. While some contacts noted wage increases were concentrated more among low-skill workers, others said they were more evenly distributed across skill levels. Also, some contacts reported that raising starting wages successfully attracted workers, while others noted that their increased wages were still being met with demands for even higher pay. A large transportation services company said they increased wages for package handlers to $20 an hour earlier in the year and recently offered referral bonuses to employees, more paid time off, and tuition reimbursement. According to a December Dallas Fed survey of more than 300 Texas business executives, wages rose 7 percent in 2021, on average, up from a reported 2 percent in 2020 and 4 percent in 2019.

Prices

Input and selling price increases remained the highest in recent history. In the energy sector, cost pressures accelerated to new heights. Construction contacts reported that the cost of materials remained steady but elevated, except for lumber prices which climbed over the past six weeks. Many manufacturers noted acute price pressures due to ongoing supply chain shortages, particularly metals and food inputs. Auto dealers reported persistently high prices on used cars due to a lack of inventory.

Very strong annual price growth was seen among Texas businesses in 2021, according to a year-end survey conducted by the Dallas Fed. Respondents said input prices rose about 10 percent, on average, and selling prices rose 7 percent. These figures are markedly higher than what was reported in recent years, and businesses expect elevated price pressures in 2022 as well.

Manufacturing

Expansion in the Texas manufacturing sector continued at an impressive clip in December, despite continued supply-chain and labor challenges. Growth was led by nondurables, particularly food and chemical manufacturing. Sharply rising input costs have led to decreased operating margins among many manufacturers, though some have been able to pass on the higher costs to customers. Outlooks improved over the reporting period, though uncertainty continued to rise due to materials delays and/or shortages, inflationary pressures, and the Omicron variant of COVID-19.

Retail Sales

Retail sales continued to rise at an above-average pace in December. Auto dealers reported an increase in sales after several months of weakness, though they noted that demand continued to exceed supply in both new and used vehicles. A majority of retailers said supply-chain disruptions were restraining sales. Outlooks improved, though some contacts expressed concern over an expected persistence in supply-chain issues. An equipment wholesaler said they project supply issues through fourth quarter 2022.

Nonfinancial Services

Texas service sector activity continued to expand at a robust pace overall. Revenue growth was broad based, with particular strength seen in health care. Growth slowed in transportation services and leisure and hospitality in December after surging in November, but it remained robust. A major airline said they were just beginning a solid recovery from the slowdown caused by the Delta variant but now they are again seeing a pullback in demand from the Omicron variant. A hospitality contact reported order cancellations for larger events and private functions due to the resurgence of COVID. Staffing services firms reported strong demand over the past six weeks, particularly from the healthcare, manufacturing and construction sectors. Overall, services firms said their biggest revenue restraint is limited operating capacity due to staffing shortages, particularly absenteeism and difficulty hiring.

Outlooks remained optimistic, and expectations are for increased activity going into 2022. Risks include the path of the pandemic, supply-chain stresses, and inflation.

Construction and Real Estate

Home sales remained strong and in line with expectations. While sales rose, construction capacity continued to be highly constrained, delaying home closings. Prices crept higher and discounting was limited, though a few builders noted offering incentives in select communities. Inventories remained constrained and lot supply tight. Builders' margins were solid, and outlooks were generally optimistic, though contacts voiced concern about production challenges, lot pricing, and a potential increase in mortgage rates.

Apartment leasing continued to be robust. Occupancy was at or above the full mark cutoff in most markets, and rents advanced further. Investor interest was highly elevated, boosting sales activity and new development. Demand for industrial space stayed exceptionally strong, while office leasing was still sluggish, though activity has ticked up.

Financial Services

Loan demand picked up pace over the past six weeks, driving up overall loan-volume growth. Loan volumes increased across lending types, led by commercial real estate. Volume growth accelerated for commercial and industrial loans, and consumer loans increased after weakening slightly last period. Nonperforming loans continued to decrease, and credit standards and terms remained largely unchanged. General business activity improved further, though contacts expressed concern over inflation, supply-chain disruptions and labor shortages. Outlooks for loan demand and general business activity six months from now remained optimistic.

Energy

Oilfield activity rose over the past six weeks, with a notable increase in the Eleventh District rig count. Oil prices moved down but were in line with 2022 expectations of about $70 per barrel, a profitable level for most producers. Lead times for equipment in oilfield supply chains were stabilizing at high levels. Delays are not expected to worsen much more but are not expected to return to normal before 2023. Industry sentiment was dented by the Omicron variant and steady global production increases, though outlooks remained positive. Contacts expect rigs to rise steadily through the end of 2022, perhaps leading to an increase in drilling of about 25 to 35 percent next year.

Agriculture

Drought conditions worsened, with severe drought expanding in the northwest part of the District. Still, 2021 crop production was strong, particularly for cotton, outstripping last year's output thanks to more harvested acres and higher yields. Crop prices pushed higher during the reporting period, boosting sentiment among producers. However, contacts noted concerns over surging input costs and limited availability of herbicides and other items. On the livestock side, cattle prices pushed higher and demand for all meats remained strong. Outlooks are a bit uncertain, as dry conditions could restrain production prospects for next year.

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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