Eleventh District Beige Book

August 6, 2023

Summary of Economic Activity

The Eleventh District economy continued to expand at a modest pace overall. Solid growth was seen in the nonfinancial services sector, while retail sales were flat and activity in the manufacturing, energy, and financial services sectors declined. Housing demand was mixed, and home price increases remained subdued. Scant rainfall and very high temperatures depressed agricultural conditions in much of the district. Employment growth picked up slightly overall, and wage growth remained high. Input cost and selling price pressures were elevated in the service sector but modest in manufacturing. Outlooks were fairly stable, though uncertainty persists around the continuing impact from higher interest rates.

Labor Markets

Employment growth picked up slightly over the reporting period. Manufacturing hiring resumed an average pace after slowing in June, and service sector firms added to payrolls at a slightly elevated rate. Airlines reported a normalization after record hiring last year, and some layoffs were reported in cargo transportation. Overall, most Texas businesses said they were looking to hire, and while lack of applicants remained the top impediment, applicant availability generally improved over the reporting period. However, reports of labor shortages continued in health care, trucking, oilfield services, auto repair and skilled trades.

Wage pressures remained elevated, though there were some signs of moderation as the year progressed. Staffing services firms reported less pressure on wages over the past six weeks.

Prices

Price pressures remained subdued in manufacturing but still elevated in the service sector. Oilfield services firms noted some input price softening as supply chains improved. Fuel prices were up over the reporting period. Several contacts remarked that customers were more price sensitive, and an August Dallas Fed survey of more than 300 Texas business executives showed that it has become more difficult over the past three months to pass cost increases on to customers. The survey also showed that Texas businesses expect input costs to increase 4.7 percent on average this year, down from 9.6 percent increase in 2022. They expect to raise their selling prices 3.3 percent, down from 7.4 percent last year.

Manufacturing

Texas manufacturing activity continued to contract over the reporting period, with declines seen in new orders, output, and capital spending. The weakness was broad-based but most notable in chemical, high-tech, and machinery manufacturing. Food and fabricated metals manufacturing exhibited more strength than other segments. A chemical manufacturer said construction, packaging, and industrial demand were proving anemic, and that the weak outlook for China and Europe was weighing on expected export demand. Other contacts cited higher interest rates as a headwind for capital investments and construction-related manufacturing. An August Dallas Fed survey showed that thirty percent of manufacturers saw a decrease in production as a result of the recent heat wave, largely stemming from lower labor productivity and temperature-sensitive worksites. Overall, outlooks worsened, and contacts voiced concern over the current manufacturing slump.

Retail Sales

Retail sales stabilized over the past six weeks after declining in the prior period. Auto dealers noted some weakness in sales, and contacts pointed to inflation and high interest rates denting consumer demand. Several also cited a potential auto workers strike as a threat. Numerous retailers said sales have been impacted by the excessive heat hurting demand, particularly stores that rely on foot traffic. Outlooks stabilized somewhat, though were still tilted toward the negative.

Nonfinancial Services

Growth in service sector activity accelerated over the reporting period. Revenue growth was led by professional and business services, where contacts noted improved sentiment about economic conditions. Leisure and hospitality also experienced a pickup in August despite several contacts noting a negative impact from the extreme heat. Airlines said demand stayed strong over the summer, especially for leisure travel. Health care remained a weak spot. Overall, outlooks were fairly stable, with contacts expecting moderate growth over the next six months.

Construction and Real Estate

Housing demand remained solid for new homes due to incentives such as rate buydowns that help lower mortgage rates. In contrast, existing home sales declined due to high mortgage rates and low inventories of homes available for sale. Home price increases remained subdued. Construction for new homes increased, while multifamily construction trended down. A wave of new apartment units has caused rents to fall and vacancy rates to increase.

The office market continues to face sluggish rents and high vacancy rates. The outlook is brighter for new Class A office buildings than older office buildings and other categories which face a more uncertain future. The retail market is doing well, though it is expected to slow as consumer spending weakens. The industrial market remains solid.

Financial Services

Loan demand declined for the eighth period in a row—now a full year—though the rate of decline eased somewhat. The pace of decline in overall loan volume also decelerated, but residential real estate loan volume declined sharply after stabilizing in May and June. Loan nonperformance continued to increase, particularly for consumer loans. Loan pricing pushed up further. Credit standards continued to tighten, though the share of bankers reporting a tightening fell to its lowest level since February. Bankers' outlooks remained pessimistic, with most expecting a decrease in loan demand and a deterioration of general business activity over the next six months.

Energy

Drilling activity for oil and gas wells declined over the past six weeks, particularly for smaller producers. The Eleventh District rig count fell moderately again, with past increases in costs and declines in prices for crude oil and natural gas making some projects uneconomical. Well completions eased but continued to hold up better than drilling activity. Most contacts expect the rig count to stabilize soon, and some expressed receding recession risks.

Agriculture

A significant portion of the district entered (or reentered) drought over the past six weeks due to meager rainfall and soaring temperatures. Pasture conditions deteriorated, and the weather had an adverse effect on row crops. A majority of the Texas cotton crop was rated in poor to very poor condition, and abandonment is expected to be high this year. Cattle prices rose further over the reporting period, driven by tight supply and solid demand for beef.

Community Perspectives

The scarcity of affordable housing remained the most pressing issue for lower-income individuals, according to community nonprofits. High rent and costly utilities were pricing residents out of their current living situation. Contacts lamented that high construction costs pose a major challenge for affordable housing developers building more stock. One nonprofit serving senior adults said inflation coupled with a reduction in SNAP benefits has put food insecurity as the top threat to seniors, which is a change from the usual top threats of isolation and difficulty accessing healthcare.