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Beige Book Report: Dallas
January 15, 2020
Summary of Economic Activity
The Eleventh District economy expanded solidly over the reporting period, with growth increasing in most sectors. The energy sector remained weak, although drilling activity ticked up. Home sales continued to rise, even beating some expectations. The agriculture picture remained mixed. Employment growth was moderate, and upward wage pressures continued as labor availability remained a key concern. Selling prices were largely flat, while input prices continued to rise. Outlooks generally improved, with reduced trade uncertainty boosting optimism.
Employment and Wages
Employment expanded at a moderate pace overall, although layoffs continued in the oil and gas sector. Most energy contacts expect headcounts to fall further in 2020. Outside of the energy sector, hiring remained a key challenge for many companies, with some contacts expecting the lack of labor availability to continue to be a drag on business growth. Some contacts also mentioned that muted labor inflows from international and domestic sources were contributing to worker shortages.
Wages continued to increase. A survey of more than 300 Texas businesses showed that 2019 wage growth was 3.9 percent, on average, down from 4.5 percent in 2018 but about the same as in 2017. Expectations among surveyed firms were for 3.8 percent wage growth in 2020, on average.
Input prices continued to rise, except in the energy sector where they remained near a cyclical bottom. Some contacts noted that progress on trade agreements decreased uncertainty around future costs. Selling prices were largely flat, although a slight pickup was seen in the service sector, particularly among retailers. Most contacts expect increases in input costs to continue to outpace selling price increases in 2020.
Modest expansion in the manufacturing sector resumed in December after stalling out in November. Most measures of manufacturing activity—including new orders and capital expenditures—ended the year on a slightly positive note. Food manufacturing was a particular bright spot, while energy-related manufacturing activity declined.
Refinery utilization was steady, although refiners and chemical producers indicated that softening global demand, tariffs, and ongoing trade policy uncertainty were keeping downward pressure on margins. Chemical contacts noted that the phase-one trade agreement with China would remove tariffs from some forms of plastic but leave tariffs in place on many other products.
Nearly two-thirds of manufacturing contacts expect higher production this year versus 2019, and uncertainty regarding outlooks abated notably at yearend.
Retail sales growth increased over the reporting period, led by auto dealers and nondurable goods wholesalers. Some contacts pointed to trade resolutions as a driver of increased retail activity. Retail outlooks improved notably. Half of retail contacts expect higher sales in 2020 versus 2019, and 35 percent expect sales to be about the same.
Solid expansion was seen in nonfinancial services activity, a slight pickup from the prior reporting period. Growth was led by transportation services, with small parcel cargo volumes posting particular strength. Staffing services contacts indicated increased demand. Weaker activity centered on the softness in the oilfield.
Outlooks continued to improve, although political uncertainty remained a concern. Several contacts noted that the passage of the USMCA should bolster growth by giving more certainty to the business environment. Overall, a majority of contacts expect stronger revenues this year.
Construction and Real Estate
Home sales rose broadly, with demand exceeding expectations in some areas thanks to healthy job growth and low mortgage rates. Builders' margins mostly held steady, as builders were able to push through price increases to cover increases in construction costs. Development in previously less desirable locations has accelerated as builders focus on expanding offerings at more affordable price points. Outlooks were favorable, although a few contacts noted concern about the impact of the 2020 elections on home buying activity.
Apartment demand remained healthy, with occupancy flat to up year over year and rent growth holding above long-term averages across most major Texas metros. Activity in the office market was mixed in Houston, while San Antonio and Dallas-Fort Worth saw steady demand. Industrial demand generally remained strong, particularly in DFW. New development of retail space remained modest and was driven by grocery-anchored shopping centers. Investor interest remained high for commercial properties in Texas' major markets.
Growth in loan demand increased over the reporting period. Loan volume growth was broad based across all lending categories, with real estate lending (both commercial and residential) continuing to lead growth. Bankers reported that loan pricing continued to decline, and the vast majority noted no change in credit standards and terms. Business activity improved since the last reporting period, and expectations for activity six months from now have improved slightly.
Drilling activity in the Eleventh District ticked up slightly over the reporting period, after several months of declines. Contacts indicated that the rig count was likely near a soft bottom, although further declines are possible. The industry remained distressed as access to capital was limited, especially for small firms. Bankruptcies were likely to rise, according to contacts. However, U.S. crude oil production is still projected to grow in 2020.
More than half of Texas remained abnormally dry or in drought, although drought severity eased somewhat over the reporting period. Agricultural producers expressed concern over dry conditions damping crop production next year. This is especially pertinent given relatively low crop prices, as above-average production is needed in order for farmers to achieve profitability. Cotton exports were quite strong, and lower U.S. and world supplies boosted price outlooks. The signing of the USMCA alleviated some uncertainty among agricultural producers, and progress on U.S. and China trade disputes added optimism.
For more information about District economic conditions visit: www.dallasfed.org/research/texas