Eleventh District Beige Book

March 2, 2022

Summary of economic activity

Expansion in the Eleventh District economy moderated, with the COVID-19 surge exacerbating labor and supply-chain shortages and disrupting demand in certain sectors. Growth in manufacturing and nonfinancial services continued but at a slower pace, and retail sales declined slightly. Loan demand growth decreased a bit amid rising interest rates. Home sales remained elevated. The energy sector saw further expansion, while worsened drought hampered agricultural conditions. Employment rose fairly robustly, and wage growth pushed to new highs due to widespread labor shortages. Supply-chain issues continued to drive up costs, and prices rose at a rapid clip. Outlooks remained positive, though uncertainty surged and businesses expressed concern that labor market tightness and supply-chain disruptions will not soon be resolved.

Labor markets

Employment growth remained robust. Job gains were widespread across sectors and strongest in manufacturing, banking, real estate, and health care. Acute worker shortages persisted, however, and many contacts said the recent COVID-19 surge brought on new or worsened hiring difficulty. Contacts cited a lack of applicants as the primary hiring impediment, with significantly more saying the availability of applicants worsened than improved in January. Increased absenteeism was also a major problem over the reporting period, as workers called out sick due in large part to the Omicron surge. These absences resulted in significant widespread disruption to business operations.

Wage growth pushed to new highs over the reporting period, driven largely by labor shortages. Manufacturers noted persistent difficulties in retaining employees, saying they were having to increase wages significantly to try to convince workers to stay. This sentiment was echoed in the service sector as well, with some firms being forced to give out significant pay increases or lose key employees. A bank raised their minimum wage to $18 per hour, slightly mitigating retention issues.

Prices

Input and selling price increases remained at or near historical highs. Contacts continued to cite supply-chain issues as the primary driver of rising costs. Construction contacts reported sizable increases in the price of concrete, steel, PVC, drywall, and lumber. A machinery manufacturer reported raw material increases of 10 to 20 percent each month. Transportation costs continued to surge, driven by a combination of supply-side constraints and higher fuel prices. A few contacts said broad-based price increases have led to a pullback in consumer demand and business capital spending.

Manufacturing

Expansion in the Texas manufacturing sector continued but at a slower clip in January and February. Seventy percent of manufacturers noted a negative impact from the COVID-19 surge—namely increased employee absenteeism and new or worsened supply-chain disruptions—according to a Dallas Fed survey of nearly 100 Texas manufacturing firms. Demand and output growth remained robust, though, led by nondurable goods like food and chemicals. Strength was also seen in construction materials manufacturing, while weakness was seen in high-tech manufacturing. Outlooks improved modestly, though uncertainty escalated amid the Omicron surge.

Retail sales

A marked decrease in auto sales prompted a slight reduction in overall retail sales over the past six weeks. Auto dealers cited low inventories and pandemic-related disruptions to both demand and employee availability as primary sales restraints. Sales among wholesalers increased slightly, though contacts noted supply-chain issues remained a strong headwind. While uncertainty surged, outlooks were largely unchanged and most retailers still expect to see higher sales six months from now.

Nonfinancial services

Growth in Texas service-sector activity slowed sharply in January but rebounded in February. Seventy percent of firms noted a negative impact from the COVID-19 surge, and the biggest drag on January growth came from the leisure and hospitality sector, where revenues declined notably. Hotels reported cancellations and decreased business travel due to the Omicron variant, and restaurants experienced less business and severe worker shortages with employees out sick. Transportation services firms saw flat activity overall. An airport said passenger travel declined over the past six weeks due to the effect of Omicron, with many passengers cancelling or rescheduling trips for later in the year, though bookings have recently begun returning. A major Texas seaport posted record-high tonnage numbers in 2021, and developments in early 2022—including new routes and equipment—are expected to spur continued growth. A bright spot in the service sector was staffing services, which saw a pickup in revenues and broad-based, robust demand. Overall, pandemic-related weakness in the nonfinancial services sector was largely transitory, as revenue growth increased markedly in February.

Outlooks held steady in January and improved in February. Headwinds include uncertainty surrounding the path of the pandemic, supply-chain stresses, and inflation.

Construction and real estate

Home sales continued to be solid, and contacts said that rising mortgage rates have not yet impacted demand. Builders reported capping sales and/or holding off putting homes on the market until they had more clarity regarding their costs. Prices continued to trend upward, in part due to climbing material costs, particularly lumber. Operational challenges were ongoing, preventing builders from being able to finish as many units as planned. Outlooks were cautiously optimistic, with very low supply relative to demand.

Apartment leasing moderated slightly. On the commercial side, office leasing was picking up, the retail market was on a stable footing, and industrial construction and demand remained elevated.

Financial services

Loan demand increased over the past six weeks, as did loan volumes, though both rose at a slightly slower pace than in the prior period. Loan volume increases spanned lending types, led by commercial real estate. Nonperforming loans continued to decrease, and credit standards and terms tightened slightly. Loan pricing increased for the first time since mid-2019. Contacts expressed concerns about the effects of interest rate increases, inflation and staffing shortages. However, general business activity continued to improve, and outlooks for loan demand and general business activity six months from now remain optimistic.

Energy

Oilfield activity rose over the past six weeks, with a notable increase in the Eleventh District rig count. Lead times for machinery orders were stabilizing at high levels, but delays are expected to continue throughout the year. Industry sentiment improved with high oil prices, strong demand from consumers, and increasing confidence that global supplies will struggle to keep pace with demand for the remainder of the year. As such, firms revised up their expectations for oilfield activity in 2022.

Agriculture

Drought conditions worsened further, with severe drought expanding in much of the district. Agricultural commodity prices rose across the board over the reporting period, though input costs rose just as much. Producers fear profits will get squeezed with such high costs; good yields will be important for their financial position this year. On the cattle side, prices rose and consumer demand for beef remained solid. An annual inventory report from the U.S. Department of Agriculture showed fewer cattle in Texas; tighter supplies should buoy beef prices this year.