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Beige Book Report: Dallas

March 6, 2019

Summary of Economic Activity
The Eleventh District economy expanded at a moderate pace. Activity in the manufacturing, housing, and nonfinancial services sectors improved. Loan volumes ticked up, and retail sales grew modestly. Abundant soil moisture boosted outlooks in the agricultural sector. Drilling activity declined. Employment expanded moderately, despite a tight labor market. Wage growth remained elevated, while price growth eased. Outlooks improved; however, some contacts reported weaker-than-expected output/revenue growth over the reporting period and mentioned factors such as tariffs, slower activity in the energy sector, increased uncertainty, weaker global economy, and labor constraints.

Employment and Wages
Employment grew moderately during the reporting period. A lack of qualified candidates continued to challenge businesses across sectors and skill levels, but shortages remained most severe for mid-skilled positions such as nurse aides, heavy equipment technicians, auto mechanics, construction personnel, and factory floor workers. There were multiple mentions of restaurant worker shortages, and one commercial landscape management firm said they were looking to fill 75-100 entry-level positions.

Wage pressures generally remained elevated. One staffing firm noted that employers were especially willing to raise wages for jobs paying less than $15 per hour. A durable goods manufacturer said raising starting hourly pay by at least 15 percent had helped draw in more and better-qualified applicants.

Looking ahead, firms were bullish on their hiring plans. Forty-eight percent of the 384 firms responding to supplemental questions in the February Texas Business Outlook Surveys said they expect to increase their employment over the next six to twelve months while only 8 percent said they expected to decrease jobs.

Prices
Input price growth moderated, particularly in the retail sector. Homebuilders generally cited stable material costs, but lower fuel prices were mentioned by transportation service contacts. Selling price growth was slight in the construction and manufacturing sectors but moderate in service-providing industries. Passing on cost increases to customers was becoming more difficult, and contacts from various industries mentioned that margins continued to be under pressure from high costs and/or increased competition. Conversely, two staffing firms said they were able to raise bill rates as planned.

Manufacturing
Overall output growth improved slightly during the reporting period, led by an increase in fabricated metals and transportation equipment manufacturing. Outlooks among manufacturers improved compared with the previous reporting period, but trade issues, labor constraints, the rising cost of credit, and political uncertainty were cited as factors damping outlooks.

Gulf Coast refinery operating rates remained healthy in January, but contacts said that an oversupplied gasoline market will drive utilization rates lower. Outlooks were less optimistic, with demand growth projected to be soft, particularly in Mexico—a major export market.

Retail Sales
Reports on retail spending were mixed, though overall, sales expanded modestly. Some retailers noted a slight uptick in sales activity following the end of the government shutdown. By contrast, others said unfavorable weather conditions and a higher cost of credit slowed sales. Growth in online sales was softer than in the last reporting period, and auto sales weakened. Outlooks improved slightly, although two contacts said that any new auto-related tariffs would hurt future sales and/or business activity.

Nonfinancial Services
Activity in the nonfinancial services sector accelerated in the reporting period. The increase was widespread and led by growth in the professional, scientific and technical services sector. Demand for staffing services strengthened after a deceleration in activity at yearend 2018, and growth was broad-based geographically and across industries. Revenues rose in the health care and administrative support services industries. Reports from transportation services firms were mixed, with rail shipments down year over year, but air and sea cargo volumes up significantly over the same period. Airlines, accommodation, and food services firms saw slower activity in the earlier part of the reporting period partly because of the government shutdown, but demand/revenues in both industries have firmed up since then.

Uncertainty continued to cloud many contacts’ outlooks in the service sector, and trade policy issues with China and Brexit were cited as significant potential headwinds.

Construction and Real Estate
Activity in the housing market improved. Contacts noted an uptick in traffic and new home sales since the start of the year, following a slowdown at yearend 2018. Builders remained selective in signing new deals, and housing starts were expected to be relatively flat in 2019. Outlooks were more optimistic than in the last report, though a few contacts said it was too early to tell whether the recent uptick would translate into a good spring market.

Conditions were stable in the apartment market, and the expectation was for rent growth to remain solid in Austin and Fort Worth and to firm up in Houston. Industrial activity generally remained solid, and reports on the office market indicated that leasing was most active for new or recently renovated class A space.

Financial Services
Loan volumes increased slightly over the reporting period, led by higher commercial real estate lending. Consumer lending ticked up, which one contact attributed to loan requests from workers affected by the recent government shutdown. Commercial and industrial and residential real estate loan volumes dipped. Loan pricing remained competitive, while deposit volumes declined notably. Outlooks were slightly more optimistic than they were six weeks ago; however, bankers remained concerned about the lending impact of uncertainty in U.S. and global markets.

Energy
Drilling activity in the Eleventh District slowed, with the rig count declining during the reporting period. Availability of additional pipeline capacity in the Permian Basin, as early as the end of February, pushed up crude oil prices in West Texas relative to the Gulf Coast. Firms were more conservative in their capital spending plans than in the last report, with most noting that they had revised down their capital budgets based on WTI crude priced between $50 and $55. Contacts noted significantly higher uncertainty stemming from U.S.-Iran and U.S.-Venezuela policies, softening global demand, and trepidation about OPEC’s willingness to maintain production cuts.

Agriculture
Prospects for 2019 crops heading into the spring planting season were strong thanks to favorable soil moisture conditions. Producers were behind in field preparation work because of soil saturation, with planting expected to be delayed in some regions. Overall, contacts expect average to above-average crop yields this year but noted the financial situation of many producers continued to be a concern due to generally low crop prices. On the livestock side, grazing conditions were looking better this year than last and beef demand remained strong.

For more information about District economic conditions visit: www.dallasfed.org/research/texas