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Dallas: June 2022

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Beige Book Report: Dallas

June 1, 2022

Summary of Economic Activity
Expansion in the Eleventh District economy slowed to a moderate pace during the reporting period. Most notably, home sales slowed, retail sales fell, and growth in manufacturing and nonfinancial services decreased from a solid to a moderate pace. Growth in loan volumes remained strong across most loan types, except for residential real estate, which saw no change in loan volumes over the last six weeks. Activity in the energy sector expanded further, while worsening drought further hampered agricultural conditions. Employment rose robustly, and wage growth continued to be elevated amid labor market tightness. Supply-chain issues and high energy prices continued to drive up costs. Optimism in outlooks waned, and uncertainty stayed elevated amid concerns about inflation, rising interest rates, resolution of supply-chain issues, and expectations of weakening demand.

Labor Markets
Demand for labor continued to be strong, though supply remained tight. Several firms noted that staffing shortages were a drag on growth. Three-fourths of the 230 Texas business executives responding to a Dallas Fed April survey cited a lack of applicants as an impediment to hiring workers, and 30 percent within that group noted the availability of applicants had worsened over the past month. Staffing firms reported increased interest in direct hires over temporary workers in recent weeks. One contact mentioned that a large e-commerce firm intends to automate half of the jobs at a new facility in Shreveport, Louisiana, due to difficulty hiring, and there were multiple reports indicating that firms were beginning to consider outsourcing work overseas due to local labor market tightness.

Wage growth remained robust amid labor shortages. Oilfield services firms cited intensifying wage pressures, and a large energy firm noted raising wages for oilfield workers by 10 percent. Over half of the firms in the above-mentioned April survey said job applicants were looking for higher pay than what was being offered. Multiple firms reported offering referral or hiring bonuses, and a nondurable goods manufacturer noted difficulty finding nightshift workers at an average hourly wage of $27. Staffing firms reported pressure to decrease mark-ups on bill rates in response to rapidly rising wages.

Selling prices climbed further at a rapid clip. Growth in non-labor input costs remained elevated, with contacts mainly citing material shortages, supply-chain issues, and/or high fuel prices as driving the rising costs. Energy firms said that day rates for rigs had climbed by 60 percent in six months, and many were revising up their expectations for overall cost increases from 10-15 percent to 15-20 percent for the year. Transportation costs remained high, and airlines said average fares rose above pre-pandemic levels. There were multiple reports of elevated or rising prices for feedstocks, metals, and construction materials. In contrast, prices for lumber and used vehicles declined. Pricing power generally remained solid, though several contacts, particularly in the service sector, noted diminished ability to fully pass along costs to end users and pushback from customers on the rapid pace of price increases.

Texas manufacturing activity increased moderately during the reporting period. Output growth was led by nondurable goods such as food and chemical manufacturing. Gulf Coast refinery utilization rates eased in April, while chemical production increased, buoyed by strong domestic and export demand. Among durables, strength was seen in transportation equipment and construction-related manufacturing. Enduring supply-chain backlogs and logistical constraints were impeding the ability of several manufacturers to meet demand. Manufacturing outlooks were negative with contacts citing geopolitical tensions, COVID lockdowns in China, inflation, and supply-chain delays as headwinds.

Retail Sales
Retailers and wholesalers reported sustained weakness in overall sales, with tight inventories and ongoing supply chain challenges continuing to hamper growth. Auto dealers cited continued declines in sales stemming from low inventories of new vehicles; however, demand for auto servicing and parts sales was characterized as normal. A few contacts noted that the opening of the border with Mexico has greatly benefited retailers in the area. Overall outlooks were pessimistic, however, with continued concern regarding supply side stresses.

Nonfinancial Services
The service sector expanded moderately during the reporting period. Revenue growth was mostly broad-based, with continued solid increases seen in the leisure and hospitality and transportation and warehousing sectors. Staffing firms continued to report strong demand, particularly for healthcare, IT, and construction workers, and added that filling low-skilled positions was more challenging than finding high-skilled workers. Demand for air travel rose during the reporting period. Leisure travel continued to dominate airline bookings, and contacts said that strong momentum heading into the summer travel season was boosting outlooks. Vessel traffic at Texas seaports fell slightly in April but was up strongly year to date relative to 2021. Vessel dwell times remained elevated in part due to truck driver shortages. Air cargo volumes also rose, though shipments to and from China slowed. Service-sector outlooks were subdued due to expectations of weaker demand going forward and uncertainty surrounding the global economic outlook and inflation.

Construction and Real Estate
Activity in the housing market softened. The slowing was particularly pronounced at the entry price level, though rising rates were beginning to hit the move-up market as well. Builders said cancellations were up, traffic was disappointing, conversions were taking longer, and waitlists were shrinking. Offers were coming in closer to asking prices, a departure from the large premiums seen earlier, and incentives, particularly in the form of rate buydowns, rate locks or closing costs, were being reintroduced. Some builders were releasing homes earlier in the building cycle to enable clients to lock in rates. Uncertainty in outlooks increased, with contacts voicing concern about the impact of rising mortgage rates and higher home prices on affordability and future sales.

The multifamily market continued to tighten, with occupancy ticking up further. Apartment rent growth remained elevated, though there were reports of slowing at the lower end. Commercial real estate markets were steady to stronger. Office leasing continued to improve, and activity in the industrial sector remained elevated. One contact noted that underwriting standards for multifamily deals were gradually tightening, which may impact sales and valuations going forward.

Financial Services
Loan demand rose over the past six weeks despite broad increases in loan pricing. Loan volume growth spanned loan types except for residential real estate, where lending was flat. Nonperforming loans continued to decrease, and credit standards and terms tightened further. Looking six months ahead, contacts expect a decline in loan demand and general business activity and an increase in nonperforming loans. Contacts note rising interest rates, inflation, and expectations of slower growth ahead as headwinds.

Oilfield activity increased, with the Eleventh District rig count climbing further during the reporting period. Labor and supply chain constraints continued to worsen and were becoming binding in many cases, slowing the pace of drilling and well completion. Lead times for many critical parts and components were well over a year. Contacts said that raising capital was becoming slightly easier due to an improved outlook for returns. Industry sentiment was cautiously optimistic, with contacts increasingly concerned about further lengthening of lead times for materials and the probability of a recession.

Drought intensified over the past six weeks, particularly in the western part of the district. Crop conditions generally declined, with increased risk of reduced yields for this year's row crops. Forage conditions suffered from the lack of moisture, putting additional strain on livestock grazing amid highly elevated supplemental feed costs. This has led to increased culling of herds and lower calf prices. Agricultural product prices showed mixed movements over the reporting period but generally remained high. Despite high prices, contacts noted increased financial risk this year due to drought and higher input costs.

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