Eleventh District Beige Book

April 14, 2021

Summary of economic activity

The Eleventh District economy accelerated to a solid pace during the reporting period. Growth in the manufacturing, retail, and nonfinancial services sectors picked up markedly, though activity stayed below normal levels. Home sales and single-family construction remained vibrant, and apartment demand increased. Overall loan volume rose, supported by continued strength in real estate lending. Energy activity increased. Employment rose and wages increased moderately. Supply chain disruptions led to longer lead times and intensified upward price pressures in the construction, manufacturing, and retail sectors. Most contacts reported being adversely affected by Winter Storm Uri in mid-February, and some noted damages to facilities, equipment, and inventories. Outlooks were more optimistic and less uncertain than in the last report, though there was some trepidation about the impact of supply shortages and/or tighter regulation on activity.

Employment and wages

Payrolls expanded during the reporting period. Solid hiring continued in manufacturing and residential construction. Service-sector hiring, including retail, picked up. Contacts in the restaurant industry said staffing was one of their biggest headwinds in being able to open to 100 percent capacity. Shortages of specialty trades, such as framers, plumbers, and electricians, persisted in homebuilding. Reports were mixed in the energy sector, with exploration and production companies citing flat employment levels and oil-field services firms noting some hiring to meet increased demand.

Wage growth was moderate, though there were reports of significant wage pressure in industries having trouble finding and retaining workers. One professional and technical services firm noted that even with signing bonuses and an increase in starting pay to over $15 per hour, they were unable to attract qualified entry-level workers. A manufacturing firm said they were able to successfully hire for higher-paid professional positions but filling positions that paid below $20 per hour was particularly difficult. A restauranteur reported recently increasing wages by 10-15 percent to attract labor.

Prices

Price pressures intensified during the reporting period. Input costs rose strongly in the construction, manufacturing, and retail sectors driven in part by supply chain issues. There were reports of higher prices of fuel, chemicals, agricultural commodities, lumber, aluminum, and steel. Selling prices rose at an above-average pace in most sectors. Exceptions included airline ticket prices, which remain depressed due to weak demand. Shortages of semiconductor chips slowed new-vehicle production, driving up used-vehicle prices. Homebuilders reported increasing base prices by as much as $10,000 and/or rolling back incentives to offset rapidly rising costs. Land and lot prices continued to climb as well.

Manufacturing

Expansion in the manufacturing sector picked up steam in March. The acceleration was widespread, and firms noted that a portion of the rebound reflected catch-up following the outages caused by the freeze in mid-February which reduced February revenues on average by 21 percent. Some manufacturers, however, noted slower activity due to lingering delays from storm-related and other supply chain disruptions. In particular, petrochemical production has been slow to come back online, and contacts expect the ripple effects of these closures on supply chains to persist into the second half of the year. Refineries said domestic and export fuel demand was moderate over the past six weeks, drawing down product inventories during the outages. Outlooks improved markedly, although some contacts voiced concern about the dampening effect of supply constraints, extended lead times, and increased federal regulation on activity.

Retail sales

Retail sales rose sharply in March after being relatively flat for four straight months. Auto sales rebounded strongly as well during the reporting period and demand for building materials stayed robust. However, a few firms commented that the lingering effects of the mid-February winter storms continued to hamper activity. Supply chain interruptions persisted, causing severe inventory shortages and driving up costs. Outlooks turned positive for the first time since yearend 2020, though materials and parts availability and low inventories were a concern.

Nonfinancial services

Growth in the nonfinancial services sector surged in March following subdued activity in the previous reporting period. Accommodation and food services firms cited very strong activity, particularly during spring break, and a few restaurant owners said traffic was at or above pre-pandemic levels. Airlines also cited increased ticket sales thanks to spring break travel. Leisure travel continued to dominate airline bookings, and contacts noted a pickup in reservations beyond the spring break period. Professional and technical services continued to see robust revenue growth, and staffing firms reported broad-based increases in demand. In transportation services, air cargo volumes were down in part due to seasonality, while shipments coming through the Port of Houston stayed healthy. Outlooks were boosted by the vaccine rollout and reopening of the economy, although some respondents expressed apprehension regarding rising interest rates and increased regulation.

Construction and real estate

Activity in the single-family housing market remained robust. Sales continued to be characterized as broad-based and solid, with builders noting capping sales and putting prospective buyers on wait lists. The winter storm resulted in moderate damage and exacerbated existing production challenges for builders, including lengthening building-cycle times and worsening shortages of skilled labor and materials. Lot supply remained very tight as did home inventories. Outlooks were favorable, with continued concern about tight lot supply, labor and material availability and costs, and the recent uptick in mortgage rates.

Apartment demand was higher than normal in the first quarter. Renters continued to favor the suburbs, and contacts noted slight upward momentum in pricing, particularly in middle-market product. Monthly rent collections were stable, but renters were paying later than usual. Industrial construction and leasing activity remained strong. The office and retail markets were still finding their footing, and the glut of office sublease space in some markets continued to be a concern.

Financial services

Loan demand strengthened, pushing up overall loan volumes over the past six weeks. Commercial and residential real estate loan volumes expanded strongly, while consumer lending dipped, and commercial and industrial lending was flat. Loan pricing remained competitive, and credit standards remained somewhat tight. Sentiment regarding general business activity improved significantly, with nearly half of respondents reporting an increase. Outlooks were optimistic, with contacts expecting a decline in non-performing loans, higher loan demand, and increased general business activity six months from now. One contact indicated that due to increased optimism, community banks were engaging in merger and acquisition activities that were halted in 2020.

Energy

Drilling and completion activity rose further during the reporting period. Oil field services firms noted improved margin outlooks and a pickup in hiring driven by higher demand. Exploration and production firms said they expect continued incremental increases in drilling and completion activity in the second quarter. While sentiment in the oil and gas industry has notably improved, contacts remained anxious about the adverse impact of tighter federal regulations, ample spare capacity, and worsening COVID statistics in Europe on demand, profitability, and pricing.

Agriculture

Drought conditions eased somewhat in parts of the District but intensified in others. Row crop planting was underway with low soil moisture a concern. Crop prices remained largely profitable and some pushed higher over the reporting period, spurring optimism among producers. While the winter wheat crop did not suffer much damage from Winter Storm Uri, damage to other areas of Texas agriculture (citrus, livestock, and vegetables) is estimated to exceed $600 million.