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Beige Book Report: Dallas

July 17, 2019

Summary of Economic Activity
Moderate expansion continued in the Eleventh District economy. Growth in nonfinancial services and manufacturing sectors picked up in June. Retail sales and drilling activity declined. Home sales continued to climb, buoyed by lower mortgage rates. Loan volumes rose at a faster pace, and crop and pasture conditions were mostly favorable. Employment expanded moderately and wage growth remained elevated. Input cost pressures rose in manufacturing, which multiple contacts attributed to the tariffs. Outlooks improved among service sector contacts but worsened among manufacturers and uncertainty increased due to growing concern over tariffs and trade tensions. About 28 percent of respondents to the supplemental questions in the June Texas Business Outlook Surveys indicated being negatively affected by the tariffs while only 5 percent noted a positive impact.

Employment and Wages 
Employment expanded moderately during the reporting period, though there were scattered reports of layoffs. Contacts noted continued difficulty in finding mid-skilled workers. Shortages of truck drivers and food services staff continued. Demand for craft labor remained healthy for midstream chemical manufacturing and port infrastructure-related construction projects. Labor market tightness in the homebuilding industry eased slightly. Energy firms expressed little to no interest in expanding headcounts. Wage pressures generally remained elevated, particularly in energy-intensive areas, and most staffing firms were raising billing rates. There were multiple mentions of rising health care costs.

Prices
Input price pressures remained moderate in the service sector but ticked up in manufacturing partly due to tariffs. Airlines reported higher airport rental and landing fees and maintenance costs. Steel prices softened in part due to lack of demand, while reports on changes in other construction materials prices were mixed. Energy contacts said drilling, fracking, and pressure pumping costs were flat to down. Selling price pressures were generally modest.

Among the 360 firms responding to supplemental questions on the impact of tariffs on their businesses in the June Texas Business Outlook Surveys, 36 percent noted experiencing higher input costs and 22 percent cited an increase in selling prices.

Manufacturing 
Expansion in the manufacturing sector picked up in June following softening in May. Output growth in durables was sluggish due to softening in primary metals, fabricated metals, and computer products manufacturing. However, expansion in nondurable goods manufacturing strengthened, with food and chemical manufacturing remaining bright spots. Refinery operating rates were healthy in May and June. Higher prices for heavy crudes processed at Gulf Coast refineries have eroded margin expectations.

Overall outlooks among manufacturers deteriorated, with trade negotiations and tariffs and uncertainty in energy markets weighing on sentiment.

Retail Sales
Retail sales declined over the reporting period. Contacts reported steady demand for autos but weakness in some seasonal segments. Outlooks worsened and uncertainty was elevated partly due to ongoing concerns over tariffs and trade tensions.

Nonfinancial Services
Growth in nonfinancial services activity was broad based and accelerated in June. A few contacts said that lower interest rates and momentum from prior solid demand were supporting activity. Staffing services companies continued to experience year-over-year demand increases, with strength widespread geographically and across industries. Activity in the transportation and warehousing sector was elevated, with sea cargo and small parcel volumes up notably compared with last year. Rail shipments fell during the reporting period impacted by bad weather, tariffs, and trade issues. Airlines cited healthy passenger demand, particularly for domestic and corporate travel. Revenues expanded in the professional and technical services, information services, and accommodation and food services industries.

Service-sector outlooks were optimistic on net, although uncertainty surrounding trade policy remained a drag on expectations of future activity.

Construction and Real Estate
Homes sales rose during the reporting period, which most contacts attributed to lower mortgage rates. Sales in DFW were exceeding expectations but remained below year-ago levels, while sales in Austin and Houston were above last year's levels. Lot development and single-family construction in many areas has been delayed by spring rains. Builders remained cautious about signing on new lot deals. Outlooks stayed optimistic with builders generally on plan for 2019, though there was widespread concern about margin compression and the impact of tariffs on material costs.

Apartment demand surged in DFW and Houston in the second quarter, helping rent growth gain momentum in DFW; however, rents in Houston remained flat. Apartment leasing was healthy in Austin and San Antonio, firming up occupancy and rents.

Reports on the office market indicated leasing was most active for new class A space. Industrial demand and construction remained strong.

Financial Services
Loan volumes expanded at a faster pace compared with the previous reporting period. Growth was broad based, with particular strength in residential real estate and commercial and industrial lending. Cost of funds continued to increase, and net interest margins fell further. Credit standards tightened modestly. Outlooks remained optimistic, with most contacts expecting continued increases in loan demand.

Energy
Drilling activity in the Eleventh District slipped further as firms continued to rein in spending and orders for new equipment. Oilfield service companies are hungry for work, and fierce competition is keeping downward pressure on industry margins. Outlooks were more pessimistic and uncertainty increased as a result of a weaker oil price outlook and a challenging environment for debt and equity issuance.

Agriculture
Moisture levels remained adequate or surplus across most of the district, delaying some plantings but improving crop conditions overall. Pasture and range conditions were quite favorable. Grain prices rose over the reporting period which, coupled with favorable crop conditions, boosted optimism among producers. However, higher grain prices were a negative for livestock producers, driving up feed costs and damping cattle prices. Many agricultural producers were concerned about imposed tariffs and uncertainty surrounding future trade policy. Cotton demand has been adversely impacted by tariffs and slowing global economic growth.

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