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Beige Book Report: Dallas

June 5, 2019

Summary of Economic Activity
Moderate expansion continued in the Eleventh District economy, although there were scattered signs of deceleration later in the reporting period. Growth in the manufacturing, nonfinancial services, and retail sectors was solid in April but softened in early May. Home sales rose and loan volumes continued to increase, led by growth in residential real estate lending. Ample soil moisture boosted prospects in the agricultural sector, though prices for several commodity declined. Drilling activity weakened. Employment rose moderately, despite being constrained by a tight labor market. Wage growth remained elevated, while price growth was mixed. Outlooks were generally less positive than during the prior reporting period, with tariff and trade negotiations driving up uncertainty.

Employment and Wages
Employment expanded moderately during the reporting period. However, energy contacts voiced little interest in growing headcounts this year. Contacts continued to report difficulty finding workers, particularly for mid-skill positions. The shortage of truck drivers continued, and the construction labor market remained tight. Wage pressures generally remained elevated.

Prices
Input price pressures remained moderate in the service sector but continued to ease in manufacturing after peaking last year in the wake of tariff announcements. An auto dealer said higher interest rates versus last year have dramatically increased the cost of carrying inventory, and transportation services firms noted rising fuel costs. Multiple contacts mentioned the long delays at the Mexico border were adding to transportation costs. Homebuilders said material costs were mostly stable, and energy contacts said drilling and fracking costs declined slightly. A couple of contacts—in manufacturing and the service sector—noted that the latest tariffs on Chinese imports will raise their costs more. Selling price growth was moderate, and reports were mixed regarding firms' ability to raise prices in step with cost increases.

Manufacturing
Expansion in the manufacturing sector continued at a moderate pace in April, with growth led by durable goods. Machinery manufacturing in particular posted notable strength after some weakness earlier this year. While output growth in nondurables eased slightly, chemical manufacturing remained a bright spot with accelerating production. Gulf Coast refinery operating rates remained healthy in April as gasoline margins improved and the summer outlook firmed.

Reports of early May activity showed a downshift in growth to a more modest pace. Outlooks worsened slightly and uncertainty increased, with trade negotiations and tariffs, the political climate, and labor constraints weighing on business sentiment.

Retail Sales
Retail sales picked up notably in April but declined in early May. Contacts reported strength in construction-related segments but weakness in autos and along the Mexico border. Outlooks worsened and uncertainty increased. Retailers cite tariffs and the resulting impact on pricing as a key concern going forward.

Nonfinancial Services
Growth in nonfinancial services activity continued at a moderate pace in April but slowed somewhat in May. Several contacts said the recent weakness was due to tariffs, and a few mentioned sluggish activity in the oil and gas sector dampening their business. In transportation services, the Texas ports posted gains in cargo traffic over the reporting period, and small parcel as well as air cargo volumes increased. One contact mentioned the negative impact that ride sharing was having on car rental companies and mass transit activity. Staffing services companies continued to report year-over-year demand increases, with strength broad based across geographies and industries.

Service-sector outlooks were less optimistic, with numerous mentions of uncertainty surrounding trade policy. Specifically, several contacts indicated a downshift in demand growth if there is a not a resolution to the trade dispute with China, although a few were optimistic that an agreement would be reached and benefit the U.S. long term.

Construction and Real Estate
Sales of new and existing homes rose during the reporting period. Contacts noted higher foot traffic in April, and a few added that new-home contract cancellations were down relative to yearend 2018. Spring rains delayed lot development and single-family construction in some areas. Finished vacant home inventories edged up. Outlooks were optimistic with builders generally on plan for 2019, although some contacts expressed concern about margin compression and trade policy uncertainty.

Apartment market conditions were mostly positive. Rent growth remained robust in Austin and modest in Dallas. Rents were flat in Houston, but contacts expect growth to firm up in the near term. Industrial demand and construction remained vibrant, and investor interest in commercial real estate continued to be solid.

Financial Services
Loan volumes increased over the past six weeks, at a pace similar to what was seen in the previous reporting period. Growth was led by residential real estate lending, with a third of banking contacts noting an increase in volumes. Growth was also seen in commercial real estate lending, while volumes of consumer and commercial and industrial loans were relatively flat over the reporting period. Loan pricing continued to increase, while net interest margins continued to decline. Credit standards and terms were unchanged from six weeks ago. Banking contacts remained optimistic, expecting future loan demand to continue to increase.

Energy
Drilling activity in the Eleventh District continued to erode as firms reined in spending and orders for new equipment. However, contacts continued to note that activity will increase once new pipeline construction is completed. As a result of declines in exploration and capital expenditures in the energy sector, oilfield services firms and capital goods suppliers have experienced a slowdown and were not planning expansion until demand increases.

Agriculture
Wet weather over the reporting period allowed moisture conditions to remain adequate or even in surplus across most of the district. While causing late plantings in some areas, overall, the rain impact was positive as it boosted growing conditions. The wheat crop was in great shape, though prices remained weak. Pasture conditions remained favorable for livestock grazing. Contacts expect a big cotton crop this year, but prices have moved lower than the cost of production for many producers. Trade discussions have put a strain on agricultural markets in general, and raised concern from agricultural industry leaders.

Several agricultural producers in southern New Mexico expressed concern over the lack of labor force growth and the strain that immigration restrictions have imposed on their current workforce. They also mentioned that the recent authorization of hemp production provides an opportunity as an alternative to pecan production, as the pecan industry has been negatively impacted by tariffs.

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