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Beige Book Report: Dallas

September 4, 2019

Summary of Economic Activity
Moderate expansion continued in the Eleventh District economy. Output growth in manufacturing strengthened, and expansion in the service sector was strong in July but eased in August. Home sales rose, and loan volumes expanded albeit at a slower pace. Retail sales were flat and drilling activity continued to decline. Agricultural conditions deteriorated due to hot and dry weather. Employment growth was solid and wage pressures remained elevated. Selling prices rose modestly, as firms' ability to pass through cost increases remained limited. Outlooks improved slightly in manufacturing but softened in the service, energy, and agricultural sectors, with uncertainty surrounding trade policy, tariffs, stock market volatility, and slowing global growth weighing on business sentiment.

Employment and Wages 
Employment expanded at a solid pace. A lack of qualified candidates continued to challenge businesses across sectors and skill levels, but shortages remained most severe for mid-skilled positions. Construction craft labor shortages were reportedly less acute, though food services firms said they were still struggling to find workers. Airlines and energy firms' headcounts were stable, with hiring limited to certain skill sets. Several firms noted that retention of employees was a challenge as well.

Wage pressures remained elevated. Many respondents said they were struggling to fill positions partly because applicants were looking for higher pay than was offered.

Prices
Input price pressures were moderate in the service and manufacturing sectors, but ticked up in retail. Selling prices dipped in manufacturing and increases were generally modest in services, as firms' ability to pass through higher costs to customers remained constrained. About 60 percent of firms responding to supplemental questions in the August Texas Business Outlook Surveys said they were able to pass on at least some cost increases, but this share was down from 76 percent in December. Refiners and chemical producers indicated that softening global demand growth and lower oil prices were putting downward pressure on an array of product prices.

Manufacturing 
Expansion in the manufacturing sector continued at a moderate pace in July, but reports of August activity showed a sizeable and broad-based pickup in output growth. Fabricated metals and construction-related manufacturing in particular saw notable strength among durables. Demand growth in nondurables was led by food manufacturing. Chemical production growth slowed in part due to softening global demand. Gulf Coast refinery utilization remained healthy on a seasonally adjusted basis.

Outlooks turned positive, though uncertainty remained elevated as trade negotiations and tariffs continued to affect business sentiment.

Retail Sales
Retailers continued to note weak activity, with sales flat over the reporting period. Auto demand, including used car sales, strengthened, but weakness prevailed in some seasonal segments. Outlooks remained pessimistic and highly uncertain, primarily driven by tariffs and trade tensions, though one contact noted interest rate uncertainty as a factor as well.

Nonfinancial Services
Nonfinancial services activity expanded strongly in July but growth eased in August. Expansion during the reporting period was led by growth in professional and technical services. Most staffing services companies continued to experience year-over-year demand increases. A few that noted softness said it was in part due to heightened uncertainty among clients. Activity in the transportation and warehousing sector was mixed, although shipments of select commodities such as steel and petroleum products rose strongly. Airlines cited healthy passenger demand, with strength in domestic business and leisure segments. Revenues also expanded in the accommodation and food services and health services industries, and one contact said that increased wait times and security at the Texas-Mexico border had reduced the number of Mexican nationals visiting San Antonio.

Service-sector outlooks were lackluster, with uncertainty surrounding trade policy, stock market volatility, slowing global growth, and expectations of a looming U.S. recession were a drag on expectations.

Construction and Real Estate
Homes sales rose during the reporting period. Existing-home sales were generally strong in July, particularly in Houston, and new-home sales were characterized as stable to solid as well. However, a few contacts noted that activity was not as robust as expected given low mortgage rates. Lot development and single-family construction was still being affected, particularly in Dallas–Fort Worth, by earlier weather-related delays. Deal flow volumes were down, as builders remained cautious about signing on new lot agreements. A few contacts mentioned that the build-to-rent (single-family rental) market was gaining traction. Outlooks stayed optimistic with builders generally on plan for 2019.

Apartment demand remained steady, supporting occupancy and rent growth in most major metros. Rents were flat in Houston, but contacts expect them to firm up by year end. A contact said that high land and construction costs were making it difficult to pencil new deals.

Reports on the office market indicated leasing was still most active for new class A space. Industrial demand stayed strong and generally in lockstep with the high volume of deliveries. Industrial construction continued to be elevated.

Financial Services
Loan volumes rose at a slower pace compared with the previous reporting period, with growth mixed across categories. Commercial and residential real estate lending expanded at a similar pace, but commercial and industrial loan volumes dipped and consumer loans were flat over the reporting period. Credit standards continued to tighten modestly. The cost of funds ticked up, and net interest margins fell further. Outlooks were less optimistic, as expectations of lower loan demand, trade policy uncertainty, and financial market volatility weighed on sentiment.

Energy
Drilling activity in the Eleventh District slipped further as firms continued to rein in spending and orders for new equipment. However, the number of wells being brought into production increased. International demand for oil field services was a bright spot, with excess capacity being absorbed due to improved foreign offshore drilling and spending. Outlooks were more pessimistic as a result of reduced expectations for global economic growth.

Agriculture
Higher temperatures and a lack of rainfall negatively impacted the agriculture sector over the past six weeks, with drought conditions creeping back in to parts of the district. Dryland grain crops were largely well established before weather conditions deteriorated, so solid yields were expected. Irrigated crops planted later in the growing season were feeling more of the negative impact of the weather. Most agricultural commodity prices moved down over the reporting period, prompting some pessimism among agricultural producers.

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