September 3, 2014
The Eleventh District economy grew at a moderate pace over the past six weeks. Reports on manufacturing activity were largely positive, without the scattered reports of weaker demand noted in the last report. Retail and automobile sales strengthened, and demand for nonfinancial services was stable or improved. Both home sales and commercial real estate leasing activity remained solid. Demand for oilfield services remained robust, and agricultural conditions improved. Prices increased modestly or held steady, as did employment levels. Outlooks remained optimistic.
Prices
Most responding firms said prices increased slightly or held steady since the last report, with an uptick in the share of firms raising prices. Retailers and food producers noted continued price increases for meat and dairy and were beginning to see rising prices for vegetables. Ticket prices and fees moved up across the airline industry, while fuel costs decreased. Lumber, cement and brick producers reported increases in selling prices, largely due to increasing input costs. Scattered reports of selling price increases came from other manufacturers as well. Prices for accounting services were at high levels, with firms saying that they have been able to hike rates up over the past year with very little pushback. Legal fees were flat at average levels, and loan pricing was unchanged at competitive levels.
The price of West Texas Intermediate crude oil fell since the last report, as did the price of natural gas. Gasoline and diesel prices also fell over the reporting period.
Labor Market
Employment at most firms increased or held steady, with some continued reports of difficulty in finding skilled workers. Reports of hiring were slightly less widespread than in the prior reporting period and came from airlines, auto dealers, some high-tech and transportation manufacturers, and manufacturers of construction materials (such as metals, lumber, and brick). Some construction-related manufacturers reported a shortage of truck drivers, with one contact noting they cannot compete with the wages offered in the energy sector and another saying the company is sponsoring commercial driver's license training in an effort to fill necessary positions. Retailers noted flat employment at existing stores but a couple of contacts noted continued hiring for new stores. Energy contacts continued to report a very tight labor market.
Reports of upward wage pressures were roughly as prevalent as in the last report. Staffing services firms noted that wage pressures remained strongest for skilled workers. Upward wage pressures were reported across the manufacturing sector, from semi-skilled positions in construction-related manufacturing to high-skilled positions in high-tech manufacturing. Energy industry contacts continued to note upward pressure on wages and bonuses.
Manufacturing
Most manufacturers noted an increase in demand since the last report and outlooks were nearly unanimously positive. Primary and fabricated metals producers noted broad-based improvement in demand, with one contact saying that demand resulting from highway, commercial building, and energy-related work was particularly robust. Demand reports from lumber, cement, glass, and brick manufacturers were mixed but all contacts noted that business was up from a year ago.
Contacts in high-tech manufacturing reported that demand grew at a good pace over the past six weeks. Demand for semiconductors from the auto and industrial sectors was particularly strong, and one contact noted that there was some increase in demand from computer manufacturers that may be related to the termination of support for the Windows XP operating system.
Food producers said demand was flat over the reporting period but up slightly from a year ago. Chemical producers reported higher production rates. Refinery utilization rates increased and lower oil prices and a wider spread between domestic and international oil prices helped boost refiner margins in recent weeks. Outlooks of refiners and chemical producers remained positive.
Retail Sales
Retail sales increased over the reporting period, but reports on the pace of growth were mixed; stronger growth was seen in stores benefiting from back-to-school shopping while food price inflation likely hampered grocery sales growth. According to three national retailers, demand in Texas continued to slightly outperform the nation as a whole. One contact noted that demand in areas of Texas with more energy-related activity was growing faster than in the rest of the state. Contacts' outlooks were positive, with growth expectations for 2014 versus 2013 ranging from low- to mid-single digits.
Automobile sales increased at roughly the same pace as during the last reporting period. Contacts noted that July was a great month for the industry; one auto dealer said it was their best month ever. Demand was up relative to a year ago. Contacts' outlooks for the rest of the year were good, with one contact expecting growth in the second half of the year to be better than in the first.
Nonfinancial Services
Nonfinancial services firms reported demand was flat to up from six weeks ago, and all were optimistic in their outlooks for the months ahead. Demand reports from staffing firms were mixed, although contacts noting an increase said it was broad-based across sectors, with particular strength in direct hires for engineers, IT, and science positions. Demand for legal services was flat, although contacts said health care was a new bright spot. Two legal contacts anticipate increased work from energy-related projects and another noted additional compliance work for banks.
Transportation service firms said overall cargo volumes increased since the last report. Changes in shipping cargo volumes were mixed but notable growth was seen for steel. Railroad contacts reported an increase in year-to-date cargo volumes versus the same period a year ago. One contact noted that motor vehicle, lumber, metallic ore, and crushed stone volumes rose markedly in the western part of the U.S. over the reporting period. Small-parcel cargo volumes increased in July for the fifth consecutive month, with growth driven by retail trade (led by e-commerce) and wholesale durables.
Airlines reported that passenger demand was flat over the reporting period and up from a year ago. Domestic demand has been stronger than international demand, and one contact noted a large increase in corporate demand.
Construction and Real Estate
Home sales grew at a steady to slightly slower pace since the last report, and sales were generally even with last year's levels. New home prices continued to rise, in part due to low inventories of finished lots and high construction costs, and contacts noted decreased affordability for entry-level buyers. Apartment demand remained strong, and contacts noted increases in occupancy rates and solid rent growth. Contacts said multifamily construction remained at elevated levels, and overall outlooks were optimistic.
Demand for commercial real estate remained solid. Office leasing activity was steady, and according to one contact construction activity slowed in Houston but increased slightly in Dallas. Demand for industrial space was strong, particularly in Dallas where leasing activity among mid-size tenants picked up. Outlooks remained generally positive.
Financial Services
Loan demand remained soft but increased slightly from the last report. Credit-funded oil and gas and other commercial and industrial projects contributed to the uptick. Residential and commercial real estate loans and small business lending demand remained fairly stable. Mortgage lending grew only slightly, as credit conditions remained notably tight. Loan quality improved, and interest rates on loans remained low. Deposit volumes continued to grow despite deposit rates staying near zero percent. Compliance costs from federal- and county-level regulations were noted as increasingly burdensome by multiple contacts. Outlooks were more positive than at the time of the last report, in light of mounting evidence of a strengthening Texas business climate.
Energy
Demand for oilfield services remained robust. Growth in Texas drilling activity over the reporting period was concentrated outside of the major basins. Margins for oilfield service providers were largely unchanged. Geological service firms continued to see strong demand. Outlooks for the rest of the year remained optimistic and were largely unchanged from the prior reporting period.
Agriculture
The severity of District drought conditions eased over the reporting period, particularly in the Texas Panhandle and southern New Mexico. Texas' cotton crop was mostly in fair to good condition and harvesting started in some areas. Most crop prices declined over the past six weeks due to expectations of very high U.S. corn, cotton, and soybean production. Domestic demand for beef remained solid despite continued record-breaking cattle prices. Some cattle producers have started to rebuild their herds after the sharp liquidations that took place over the past few years, but progress has been slow because of historically high cattle prices.