Eleventh District Beige Book

April 20, 2022

Summary of economic activity

Expansion in the Eleventh District economy accelerated during the reporting period as the impact of the Omicron wave faded. Most notably, growth in nonfinancial services, particularly the leisure and hospitality sector, strengthened. Manufacturing output growth was solid, while retail sales dipped slightly. Loan demand increased strongly, and home sales remained solid despite a spike in mortgage rates. Activity in the energy sector expanded further in part due to the recent run-up in energy prices, while worsening drought hampered agricultural conditions. Employment rose robustly, and wage growth continued to be highly elevated due to labor market tightness. Supply-chain issues remained acute, driving up input and selling prices. Outlooks were mixed, and uncertainty climbed, with rising concern about the effects on future growth of escalating geopolitical tensions, climbing wages, rising interest rates, inflation, lingering supply-chain disruptions, and labor shortages.

Labor markets

Employment expanded strongly, with job gains widespread across sectors. Worker shortages remained endemic, and many firms noted continued difficulties in hiring and/or retaining employees, particularly those in the healthcare, IT, and education sectors. One contact noted an uptick in workers being poached by large tech companies offering sizable (up to 50 percent) salary increases. Nearly two-fifths of the more than 300 Texas business executives responding to a Dallas Fed March survey cited staffing shortages as a key restraint to revenue growth.

Wage growth remained at or near record highs, driven largely by labor shortages. Firms said that workers were looking for higher compensation, better benefits, and increased flexibility to work from home. According to the above-mentioned March survey, Texas businesses expect wages to rise by 6.9 percent on average this year, after increasing 7 percent in 2021.

Prices

Input and selling prices continued to increase at a rapid clip. Contacts cited supply-chain issues, rising wages, and/or high energy prices as mainly driving the rising costs. A manufacturer commented that many vendors were either not providing price quotes or were quoting prices that were valid for less than 24 hours, making it difficult to process both existing and new orders. Sustained pricing pressures were impacting small firms more than large firms, and a contact noted that large discount retailers were fining suppliers for late or incomplete deliveries. Transportation costs surged, and there were widespread reports of transportation firms raising rates and/or instituting fuel surcharges. Airline contacts said air fares have increased recently, and they plan to add surcharges due to the spike in fuel prices.

Manufacturing

Expansion in the Texas manufacturing sector continued at a solid pace, despite enduring supply-chain issues and labor challenges. Output growth was led by durable goods such as machinery and construction materials manufacturing. Strength was also seen in high-tech, fabricated metals, and food manufacturing. Gulf Coast refinery utilization rate rose to 93.8 percent in March supported in part by surging margins. Manufacturing outlooks were mixed as uncertainty arising from geopolitical tensions, inflation, high energy prices, supply-chain delays, and labor shortages weighed on manufacturers' sentiment.

Retail sales

Retailers reported a slight reduction in overall sales in March due to low inventories and ongoing challenges with supply chains. A wholesaler in food services noted difficulty sourcing proteins, and auto dealers cited continued declines in sales stemming from low inventories, particularly for new vehicles. Availability of auto parts was also cited as a factor hampering revenues in the auto repair side of the business. In contrast, contacts in the Rio Grande Valley noted that an increase in border crossings had boosted retail traffic in the area. Overall, however, outlooks were pessimistic, with continued concern regarding supply side stresses.

Nonfinancial services

Activity in the service sector accelerated after slowing in the previous reporting period due to the Omicron surge. Revenue growth was robust and broad-based, with strong increases seen in the leisure and hospitality, transportation and warehousing, other services, and professional and business services sectors. Staffing firms noted continued strong demand, particularly for healthcare and IT workers. Air travel picked up during the reporting period, with demand primarily driven by leisure travel, particularly spring break travelers, though business travel ticked up as well. A major Texas seaport continued to post strong increases in container traffic, and air cargo shipments also rose. Service-sector outlooks were less optimistic due to increased uncertainty surrounding the impact of the Russia-Ukraine war on inflation and supply-chain issues and concerns surrounding new COVID variants and labor shortages.

Construction and real estate

Activity in the housing market remained solid, despite a sharp rise in mortgage rates. There were scattered reports of slowing traffic, which contacts attributed to rate sensitivity, but by and large sales were holding up well. A few builders noted providing closing cost incentives that could be used by buyers to buy down rates. Prices continued to trend upward, keeping pace with rising costs. Operational challenges were ongoing, keeping new home supply limited. Outlooks were cautiously optimistic, with contacts expressing concern about the impact of rising mortgage rates and higher home prices on affordability and future sales.

Apartment leasing remained solid, further bolstering occupancy and rents, and contacts foresee continued strong growth in rents. On the commercial side, office leasing was slowly bouncing back from the COVID-induced slump, pushing down vacancy rates. The retail market continued to see measurable gains in absorption, and industrial construction and demand remained near historic highs. While investment sales activity remained robust, rising rates were noted as a headwind.

Financial services

Loan demand continued to increase at a robust pace over the past six weeks, despite a sharp rise in loan pricing. Loan volume increases spanned lending types, and growth remained strongest for commercial real estate loans. Nonperforming loans continued to decrease, and credit standards and terms tightened slightly. Contacts expressed concerns about the effects of interest rate increases, inflation, rising wages, and staffing shortages. Respondents expect increases in loan demand and decreases in nonperforming loans over the next six months. While general business activity continued to improve, expectations for six months from now were mixed.

Energy

Oilfield activity increased during the reporting period, with the Eleventh District rig count climbing further and oil and natural gas production rising. Many upstream contacts said their firm's oil production will expand this year, with smaller firms expected to ramp up activity at a faster pace than larger ones. Lead times for machinery orders were extended, and oilfield equipment manufacturers and servicers said that capacity remained constrained due to labor shortages and supply side challenges. While uncertainty surged, outlooks were optimistic, bolstered by strong consumer demand and expectations of limited global supply growth this year.

Agriculture

Drought continued to worsen across much of the district, hampering agricultural conditions. Higher input costs—including fuel, fertilizer, and machinery—are pinching the financial position of many agricultural producers. While higher crop prices can help alleviate some of the financial pressure, it remains to be seen if prices will still be high at harvest time when producers have a crop to sell, and drought risk is deterring many from forward contracting at current prices. On the livestock side, cattle prices have been flat to down over the past six weeks and feed costs have risen sharply, and as a result some herd culling has begun.