Beige Book Report: Dallas
April 18, 2018
Summary of Economic Activity
The Eleventh District economy expanded at a moderate pace over the past six weeks. Growth in the nonfinancial services sector accelerated, and retail sales rebounded. Loan demand growth picked up. Robust expansion in the energy industry continued, while growth in manufacturing eased somewhat. Home sales continued to rise. Hiring was solid across most sectors, and widespread labor shortages continued. Wage and price growth remained elevated, and several contacts noted a marked rise in the cost of steel. Outlooks, while still optimistic, have become more uncertain due to new tariffs and trade concerns.
Employment and Wages
Solid employment growth continued, and wage pressures remained elevated. Hiring picked up pace in services, retail and energy. Among manufacturers, employment growth eased a bit. Labor shortages either continued or escalated, covering a wide array of industries and skill levels. Multiple contacts said employee retention had become increasingly difficult across skillsets, although they noted that low-skill workers in particular were quick to leave for better-paying positions. Contacts reported that some rural employers were busing in workers from nearby cities because their local labor pool was tapped out. Wage growth remained elevated across the board and increased further in the energy industry.
Prices
Price pressures remained elevated over the past six weeks. Input cost pressures increased among energy, manufacturing, and construction firms, partly due to the announced tariffs on steel and aluminum. Upstream energy firms said the steel tariffs represent a worry, although some contacts said there shouldn't be much of an impact on costs until 2019 when contracts roll over. Downstream energy contacts were still figuring out how much of their steel is subject to the new tariff and how that will affect their costs and investment decisions. Several manufacturers said that talk of steel tariffs immediately resulted in higher steel prices. An architecture firm noted that the increase in steel costs will impact the ability of their clients to move forward with some construction projects. Average gasoline and diesel prices were fairly stable, although transportation services contacts noted that fuel costs were up notably from a year ago.
Manufacturing
Expansion in the manufacturing sector continued, although the overall pace of growth eased from the highs seen in recent months. Output growth was led by transportation and high tech manufacturing, two sectors that saw an acceleration over the reporting period. Growth in chemical production receded from February's elevated rates, and fabricated metals and food production continued to post slower growth relative to other types of manufacturing. Expectations regarding future business conditions remained optimistic, although several contacts noted that the newly enacted tariffs were creating a lot of uncertainty in their outlooks for activity and prices. Refiners and petrochemical producers specifically mentioned their views about the potential negative impact of these tariffs on construction projects.
Retail Sales
Retail sales rebounded over the past six weeks, led by a sharp rise in auto sales after a challenging start to the year. A clothing retailer noted that sales continued to stabilize in stores located in oil patch markets, while sales in stores along the border started to slip once again. Other contacts also mentioned softness in retail sales along the border, citing online retailing and the development of retail space in Mexico as drivers of the weakness. For retail more broadly, contacts noted a continued increase in internet sales, with growth accelerating over the reporting period. Outlooks among retailers in general remained positive, but some contacts said their expectations were clouded by the potential negative impacts of trade and immigration policies.
Nonfinancial Services
Growth in the nonfinancial services sector picked up over the reporting period, with most industries noting an acceleration. Leisure and hospitality was a particular bright spot, with revenue growing again after weakness earlier this year. Transportation services firms said rail and air cargo volumes strengthened further while courier cargo and airline demand remained stable. Growth in health care lagged other industries, with contacts pointing to a challenging environment with increased regulatory requirements and decreased funding and/or reimbursements. Staffing services contacts noted high levels of demand, driven by activity being broad based across geographies and sectors. Outlooks rose slightly over the past six weeks, although uncertainty surrounding trade policies and the new tariffs negatively impacted some firms' expectations.
Construction and Real Estate
Home sales rose moderately since the last report, with particular strength noted at the lower price points. Outlooks were positive, but there is concern among builders about margin compression and the impact of rising mortgage rates on future sales. Apartment demand was seasonally slow during the first quarter, and occupancy rates fell in all major Texas metro areas as an aggressive pace of new deliveries exceeded demand. Rent growth accelerated in Houston, but was sluggish in Dallas and San Antonio and dipped in Austin. Multifamily construction remained active, although it has moderated somewhat relative to last year.
Office market conditions remained weak in Houston, and contacts reported an uptick in sublease space. The industrial market was characterized as solid, and the vacancy rate generally remained low across major metros. Reports on retail leasing activity were mixed.
Financial Services
Overall loan volumes and demand increased at a faster pace over the past six weeks. Markedly stronger growth in loan volumes was seen in commercial and industrial, and commercial real estate. Residential real estate loan volumes continued to grow at roughly the same pace as during the prior reporting period, while consumer loan volumes declined. Credit standards and terms continued to tighten, and loan pricing increased at a similar pace as the prior report. Banking contacts remained optimistic, expecting total loan demand to be better six months from now. Some contacts mentioned optimism in the market due to tax reform, while others noted uncertainty about how new tariffs will impact Texas businesses.
Energy
Energy activity continued to expand moderately. The rig count increased over the reporting period and drilling and completion activity was up in the Permian Basin and Eagle Ford. Outlooks remained positive for 2018, supported by oil prices holding at levels at which the vast majority of firms can profitably increase drilling. However, multiple contacts suggested tight markets for labor and equipment may constrain further acceleration in drilling activity.
Agriculture
Drought conditions plagued much of Texas, severely so in the Texas panhandle. Lack of soil moisture particularly affected winter wheat, and the crop was largely in poor to very poor condition. Pasture conditions were also negatively impacted, and some ranchers were moving cattle from grazing to feedlots earlier than usual. Texas will see an increase in cotton acres this year, according to contacts, driven by strong demand, relatively high cotton prices, and new provisions in the farm bill. Cattle prices declined over the reporting period, and milk prices remained low enough to start forcing some smaller dairies out of business. Trade issues continued to make agricultural producers and lenders nervous.
For more information about District economic conditions visit: www.dallasfed.org/research/texas