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Eleventh District Beige Book

July 13, 2022

Summary of Economic Activity

Growth in the Eleventh District economy slowed to a modest pace, with part of the deceleration in demand attributed to surging prices, rising interest rates, and higher uncertainty. Manufacturing and service sector activity slowed, and retail spending and homes sales weakened further. Solid apartment and industrial leasing continued, but loan growth eased. The energy sector saw further expansion, while drought dampened agricultural conditions. Employment expanded broadly, and wage growth remained highly elevated due to a tight labor market. Supply-chain bottlenecks and higher energy prices continued to drive up costs, and prices rose at a rapid clip, though pass through was becoming more difficult for firms, eroding margins. Outlooks were mostly negative, and uncertainty surged, with contacts voicing concern about slowing future demand and increased risk of a recession stemming from high prices, supply-side constraints, weakening consumer sentiment, and rising interest rates.

Labor Markets

Employment continued to expand broadly, except in retail where it was little changed. Staffing challenges remained widespread, with many firms reporting that they were a drag on revenue growth. However, shortages appeared to be most acute for truck drivers, pilots, health care staff, and oil field workers. Staffing firms continued to report that filling lower-skilled positions was harder than higher-skilled jobs. A restaurateur noted operating at 85 percent capacity because of staffing issues, despite increasing pay and benefits. Some contacts said labor shortages had increased workload for existing staff, resulting in retention issues.

Wage growth remained robust amid a tight labor market. Multiple firms reported offering higher pay or bonuses to retain and/or hire employees. A contact in the oilfield services firms cited intense wage pressures, with wages up 10 percent in the industry so far in 2022, after double-digit increases last year, and added that rig workers with no experience and working half the year were being paid about $85,000. A transportation equipment manufacturer cited continued difficulty hiring despite a 40 percent increase in starting pay. According to a June Dallas Fed survey of more than 300 Texas business executives, wages on average are expected to rise at an above-average pace both this year and in 2023.

Prices

Overall, input and selling price growth remained significantly elevated during the reporting period. In the energy sector, cost pressures accelerated to new heights. Construction contacts reported that the cost of materials remained steady but high, except for lumber prices which dipped slightly. Most manufacturers and service firms noted acute price pressures due to ongoing supply-chain issues, labor shortages, and high fuel prices. While price growth remained high, cost pass through was more difficult, particularly for small firms and companies in the service sector.

Exceptionally strong price growth was expected by Texas businesses in the near term. According to the earlier-mentioned survey, respondents anticipate input prices to climb 10 percent in 2022, on average, and selling prices to increase 7 percent. These figures are markedly higher than pre-pandemic rates, and businesses expect these elevated price pressures to persist next year as well.

Manufacturing

Growth in the Texas manufacturing sector slowed sharply, following solid gains in the previous reporting period. Output growth was flat, and new orders fell, with the deceleration spanning both durable and nondurable goods. The slowing was most pronounced in construction materials, fabricated metals, computer, and printing-related manufacturing. Manufacturers attributed slowing sales to rising prices and uncertainty regarding future demand. Gulf Coast refinery utilization rates edged up, and chemical output increased, buoyed by continued strong domestic and export demand. Manufacturing outlooks were negative.

Retail Sales

Retailers reported sustained weakness in overall sales, with tight inventories and ongoing supply chain challenges continuing to hamper growth, though there were some reports of higher prices and rising interest rates damping demand as well. Auto dealers cited continued declines in sales stemming from low inventories. Overall outlooks were pessimistic and highly uncertain due to supply challenges and expectations of weaker demand ahead.

Nonfinancial Services

Activity in the service sector softened during the reporting period. Revenue growth was mixed, with continued solid increases seen in transportation and warehousing but flat to weaker activity in information and accommodation and food services. Staffing firms continued to report robust and broad-based activity, though a few contacts cited some slowing in demand, particularly for construction workers. Passenger air travel demand remained solid, with leisure travel continuing to dominate bookings. Airline contacts were optimistic that second-quarter revenues will surpass comparable 2019 levels. Air cargo volumes softened largely due to a dip in international shipments as domestic volumes remained strong. Small parcel shipments edged up, and container traffic at a large Texas seaport was up strongly year to date relative to 2021. Service-sector outlooks were negative due to higher uncertainty in the face of rising prices and interest rates, weakening consumer sentiment, and growing expectations of a recession in the near term.

Construction and Real Estate

Conditions in the housing market eroded more quickly than anticipated during the reporting period. Sales were off notably from earlier in the year and both online and foot traffic slowed markedly. Cancellations rose in part due to loan qualification issues. Buyers were hesitant to move forward and were looking for better deals, and builders noted offering incentives again to drive sales. Home prices were largely flat. One contact said that lenders were raising capital requirements on new acquisition and development loans. Contacts said several new land deals were on pause due to rising uncertainty in the market. Outlooks were negative, and sales and starts expectations were being revised downward.

The multifamily market remained tight, with occupancy and rent growth staying elevated. Commercial real estate markets were mixed. Office leasing continued to improve, though net absorption was negative in some markets. Activity in the industrial sector remained robust. On the investment side, transaction volumes have softened given higher interest rates and increased uncertainty in the economic outlook.

Financial Services

Loan volume growth moderated over the past six weeks amid broad increases in loan pricing. Growth was strongest in commercial real estate followed by commercial and industrial lending, though a deceleration occurred in both categories. Residential real estate loan volumes were flat for a second consecutive reporting period after two years of solid growth. Nonperforming loans continued to decrease overall, though an uptick was seen in consumer and auto loans. Credit standards and terms tightened notably. Looking six months ahead, contacts expect that general business activity and loan demand will decrease, and nonperforming loans will increase.

Energy

Oilfield activity expanded in the district. The rig count rose, and oil and natural gas production increased. Labor and supply chain constraints continued to limit the pace of drilling and well completion activity. Lead times for critical parts and components, such as engines and transmissions, were over a year, and a severe shortage of steel tubular goods was reported. Industry sentiment was largely optimistic, though uncertainty rose, and expectations were for slow growth ahead due to very limited spare capacity—a result of supply-chain and labor challenges.

Agriculture

Much of the district remained in severe drought, causing agricultural conditions to deteriorate further. The wheat harvest was wrapping up and with much lower harvestable acres and yields, production is expected to be substantially below average. Agricultural producers continued to be concerned with production cost increases and the availability of inputs. With prices and costs at high levels, producers may still be able to generate a profit, but current drought conditions create a higher-risk situation than normal. Ranchers continued to reduce herd sizes amid poor grazing conditions and limited hay supplies. Contacts noted that the strengthening dollar combined with higher transportation costs and logistics issues could negatively impact agricultural exports moving forward.

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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