Beige Book Report: Dallas
October 15, 2014
The Eleventh District economy grew at a moderate pace over the past six weeks. Manufacturers mostly reported increases in demand, and retail and automobile sales expanded at a pace in line with the prior report. Demand for nonfinancial services generally improved and real estate activity remained solid. The energy sector continued to grow, and agricultural conditions improved. Upward price pressures eased slightly and employment held steady or increased. Outlooks remained optimistic across the board.
Prices
Most responding firms said prices held steady over the last six weeks, with fewer reports of firms raising prices than in the previous report. Professional business services firms said rates were unchanged over the reporting period (though higher than a year ago), and retailers and auto dealers also noted steady prices. Changes in selling prices in the manufacturing sector were mixed. Prices for construction materials such as fabricated metals, concrete, brick, and glass rose, while prices for primary metals, transportation equipment, and high-tech products held steady and lumber prices fell slightly. Food producers continued to note selling price increases due to rising input costs. These contacts said selling prices will likely level out before raw materials prices do, and companies will try to cut costs elsewhere.
The price of West Texas Intermediate crude oil fell over the course of the reporting period, as global supply growth met softer international demand. The price of natural gas stabilized at just under $4 per MMbtu over the past six weeks after falling during the prior reporting period. Retail gasoline and diesel prices continued to fall.
Labor Market
Employment at responding firms held steady or increased, and labor market tightness continued to be mentioned by numerous contacts. Reports of hiring came from staffing and transportation services firms and construction-related manufacturers (such as fabricated metal, cement, and brick producers). Legal firms noted a seasonal increase in headcounts from adding new fall associates. A retailer noted difficulty in hiring in the areas of the state where the energy sector was booming, and an auto dealer said they were losing mechanics and technicians to energy companies in the Eagle Ford region to repair oilfield trucks. A shortage of specialized heavy construction workers and chemical engineers was causing some delays in announced construction projects in the petrochemicals industry. Residential construction contacts also noted persistent labor shortages; one contact saw some easing while another said that in Houston, a few builders were placing cameras and armed guards at their construction sites to prevent poaching of workers. Energy contacts saw no relief from the tight labor market, especially in West Texas.
Several contacts continued to report upward wage pressures. Staffing services firms said candidates were often receiving multiple offers, which caused some firms to increase wages to stay competitive. Some primary and fabricated metals manufacturers noted higher wages; increases as high as 30 percent over the last six months were seen in some trades, according to contacts. High-tech manufacturers said wage pressures remained elevated for some higher-skilled workers.
Manufacturing
Most manufacturers noted an increase in demand since the previous report and outlooks were largely positive. Primary metals producers said demand grew but at a slower pace, possibly due to seasonal factors. Demand for fabricated metals strengthened and was up notably from last year, with contacts pointing to increased demand from a number of segments of the construction industry. Demand was mostly flat for lumber, cement, glass, and brick manufacturers, although a couple of contacts noted a pickup in demand for these products in the Dallas area.
Contacts in high-tech manufacturing reported demand was stable or higher over the past six weeks. Respondents expect strong demand growth for the next three to six months, primarily due to expansion in capacity by cloud and mobile computing providers. Food producers said demand increased somewhat over the reporting period, mostly due to seasonal factors, but was largely unchanged from a year ago.
Petrochemical producers reported slightly lower production as various repairs and upgrades to existing facilities had fallen behind schedule. Firms in this sector noted some delays in announced construction projects because of worker and materials shortages as well as delays in securing permits. Refinery utilization rates along the Gulf Coast were strong, and outlooks through year-end remained positive among refiners and chemical producers.
Retail Sales
Retail sales increased at about the same pace as during the prior reporting period. A continued boost from back-to-school shopping was the most-noted driver of recent sales growth, and demand was also up year-over-year. Contacts' outlooks for the remainder of the year were optimistic, and they expect demand during the holiday shopping season to be slightly stronger this year than in 2013.
Automobile sales continued to increase, at a pace similar to the prior reporting period. Demand was up year-over-year. Contacts were satisfied with inventory levels and said they had plenty of vehicles. Outlooks for the rest of the year were positive, although one contact noted that an increase in interest rates could drastically change the landscape of their industry.
Nonfinancial Services
Most nonfinancial services firms reported demand was up from six weeks ago, and outlooks were optimistic. Staffing firms generally noted demand increases, with one contact saying the past two weeks were the company's strongest all year. Contacts said all skill levels were in high demand, and that demand for low-skilled workers had increased. Direct hiring led demand growth, although one contact said contract and temporary worker demand will likely increase as the Affordable Care Act's effects continue to be felt. The accounting sector continued to operate at high levels of activity and demand for these services increased further over the reporting period. Demand for legal services increased as well, with particular strength coming from corporate work.
Transportation services firms said overall cargo volumes increased slightly since the previous report. Small-parcel cargo volumes increased, with retail trade (led by e-commerce) remaining the strongest source of growth. Railroad contacts noted a rise in petroleum and motor vehicle shipments. Air cargo volumes continued to trend upward as increased international air cargo demand outpaced a decline in domestic demand. Outlooks were cautiously optimistic.
Airlines reported passenger demand fell over the reporting period due to seasonal factors, but was up from a year ago. Domestic demand remained stronger than international demand.
Construction and Real Estate
The District's housing sector remained solid overall. Single-family home sales were flat to down over the reporting period. Land prices continued to trend upward at the same pace; however, the pace of home price appreciation slowed, with one respondent noting a slight pushback in pricing from buyers. Contacts said a few homebuilders were expanding production of more-affordable high-density housing. Robust apartment demand kept occupancy high and rent growth solid despite elevated levels of multifamily construction activity. Single- and multifamily housing contacts were optimistic in their near-term outlooks.
Office leasing activity increased in Dallas and Austin and held steady at high levels in Houston. Contacts noted moderate growth in rents. Demand for industrial space remained strong and vacancy rates remained tight in most major metro areas. Construction activity stayed elevated, and outlooks were mostly optimistic.
Financial Services
Demand for loans accelerated slightly since the last report. Financing for mergers and acquisitions as well as capital expenditures rose in recent weeks. Lending to medium-sized businesses continued to grow, and financing activity for commercial real estate development remained robust. Mortgage lending grew slightly, but contacts noted that a low supply of housing was constraining growth. Contacts noted increased optimism among clients.
Energy
Demand for oilfield services in the District continued to grow, although activity in the Permian Basin in September was muted temporarily by flooding. Growth in Texas drilling activity was again concentrated outside of the major basins. Outlooks for the rest of the year remained optimistic and were largely unchanged from the prior reporting period.
Agriculture
District drought conditions eased slightly over the past six weeks, although more than half of Texas remained in a drought that has plagued the state since the end of 2010. Harvesting of row crops like cotton and corn continued, and crop conditions were slightly better than last year. Cattle prices continued to be at a record high while feed prices fell, boosting profitability for cattle producers. Domestic and export beef demand remained strong despite retail beef prices reaching a record high in August. Improved moisture conditions overall have increased optimism for winter crops and expanded prospects for cattle herd rebuilding.