Eleventh District Beige Book

Summary of economic activity

The Eleventh District economy expanded modestly, with activity in most sectors holding steady or experiencing slight to modest growth. Employment rose modestly, and wages grew at an average pace. Input costs grew moderately. Selling prices rose at an average rate in the service sector but were flat in manufacturing. Demand for nonprofit services remained solid. Overall, Texas firms were more bullish on demand expectations than last quarter, with more than half expecting demand to increase over the next six months, up from 38 percent in November 2023. Overall outlooks were less pessimistic, although geopolitical instability and heightened domestic policy uncertainty were cited as key headwinds.

Labor markets

Employment expanded modestly over the past six weeks. Labor availability improved, though contacts continued to cite difficulty in filling certain positions, particularly truck drivers, mechanics, engineers, health care professionals, and machinists. One contact said they were holding on to some workers with suboptimal performance due to a tight labor market.

Wage growth was moderate across most sectors. Staffing firms cited some reprieve in wage pressures. One food manufacturer noted paying above-average wages and offering more flex time to retain staff, while a professional and business services firm said they have been able to retain employees without giving raises by offering them the ability to work remotely.

Prices

Input costs rose moderately. Selling prices rose at an average pace in the service sector but prices were flat for manufactured goods. Airfares rose in response to higher costs, and unplanned refinery outages in the Midwest and on the Gulf Coast placed modest upward pressure on fuel prices. Home prices were flat to up. Auto dealers reported lower prices for vehicles, and many energy contacts expect the level of oilfield services prices to ease slightly this year.

Manufacturing

Texas manufacturing activity stabilized in February after contracting sharply in January. New orders rose after 20 months of decline. Weakness was concentrated in durables, particularly metals manufacturing in part due to competition from imports. Demand for and output of nondurables rose, led by growth in food manufacturing. New orders for basic chemicals and plastics ticked up slightly in January, while petrochemical manufacturers noted sluggish industrial demand, stemming from weakness in demand for construction-related products and aluminum. Utilization rates dipped as refineries along the Gulf Coast experienced unexpected outages during the reporting period. Overall, manufacturing outlooks remained negative, though pessimism waned.

Retail sales

Retail sales somewhat stabilized in February after having weakened notably in January. Durable goods wholesalers and construction-related retailers saw a pickup in demand, while nonstore retailers and auto dealers noted declining sales and higher inventories. Retail outlooks remained pessimistic, though uncertainty in outlooks subsided somewhat.

Nonfinancial services

Service sector activity rose modestly in February following slight declines in January. Revenue growth was led by transportation and warehousing and health care. Airline travel remained robust, with a continuation of strong leisure demand and a slow return of business travel. There were reports of Panama Canal capacity constraints impacting container volumes at Gulf Coast ports. Professional and business services activity was relatively flat, with weakness ascribed in part to slowing activity in the real estate sector. Staffing firms reported slower-than-expected demand; however, demand for workers in health care, defense and legal services remained solid. Leisure and hospitality exhibited weakness, with one contact saying that their corporate event business was down due to the prevalence of hybrid work. Overall, outlooks in the service sector improved; nonetheless, concerns about geopolitical risks and the upcoming elections remained widespread.

Construction and real estate

Home sales rose during the reporting period, and contacts noted that the spring selling season was generally off to a good start. Cancellation rates were down, buyer incentives were less prevalent, and builders said they were raising prices slightly in some markets. Outlooks were positive, although contacts cited economic and political uncertainty, diminished affordability, and tight lending for loans as headwinds.

Activity in commercial real estate held steady during the reporting period. Apartment leasing was solid, but rents were flat to down as new supply continued to outpace demand. Office leasing remained weak; vacancy rates were elevated, and concessions remained widespread. A few contacts noted that tenants were screening the landlord's credit before leasing up space. Industrial demand was solid and in line with pre-pandemic averages. Outlooks were mixed, with economic uncertainty, high capital costs, and tight credit standards cited as deterrents to launching new projects or attracting investors.

Financial services

Loan volumes remained stable, with near equal shares of bankers reporting an increase over the past six weeks as a decrease. After six months of declines, residential real estate loan volumes stabilized in the latest period. The pace of credit tightening continued to slow, particularly for commercial real estate and commercial and industrial loans. Loan demand continued to decline. Loan nonperformance and loan pricing rose but at a more moderate pace. Looking ahead, bankers' outlooks are mixed; they expect stronger loan demand six months from now and more tempered declines in loan performance but further deterioration in overall business activity.

Energy

Oilfield activity held steady during the reporting period. Oil and gas production ticked up, but only modest increases in production were expected over the next few quarters as firms seek opportunities to consolidate. Overall, contacts expect U.S. oil production growth to slow notably this year.

Agriculture

Drought conditions receded further in Texas but remained prevalent in southern New Mexico. Recent rainfall improved pasture conditions, refilled ponds, and boosted crop prospects. Tighter supplies of cattle continued to push up prices, while crop prices moved down over the past six weeks amid increased production expectations. Farmers cited high input costs and weak crop prices as a concern and noted that above-average yields will be needed this year to break even. An increase in cotton acreage could be seen as farmers may favor cotton over grain crops due to a relatively more favorable price.

Community perspectives

Nonprofits reported continued elevated demand for services, as lower-income households faced increased difficulty in making ends meet. There were also reports of an uptick in white-collar professionals seeking financial assistance. Housing affordability remained a widespread concern, and contacts said in some instances multiple generations were living together in order to pay for housing costs. Contacts said that along the Texas-Mexico border, there was a need for migrant housing beyond the temporary assistance provided by FEMA. Mental health was cited as a growing need among youth.