December 3, 2014
The Eleventh District economy expanded at a solid pace over the past six weeks. Manufacturing activity continued to increase overall, although there were a few reports of slowing growth in demand. Retail and automobile sales reports were mixed, and nonfinancial services firms saw steady or improved demand. Sales of single-family homes slowed, but apartment, office, and industrial leasing activity remained strong. Demand for oilfield services stayed robust; agricultural conditions generally improved. Selling prices were stable or rose slightly for most firms, and employment held steady or increased. Outlooks remained optimistic, but some contacts noted concerns about the potential effect of declining oil prices on the District economy.
Prices
Most responding firms said prices increased slightly or held steady since the previous report, with a slight uptick in the share of firms raising prices. Accounting, legal, and staffing firms said rates were unchanged over the reporting period. Some staffing firms, however, mentioned plans to increase fees early next year to cover higher costs resulting from the Affordable Care Act. Retailers and auto dealers also noted steady prices, while airlines reported higher fees and fares. Manufacturers of primary metals said they were finding it difficult to raise prices. Prices of construction materials such as cement, brick, and fabricated metals rose, while prices for transportation equipment and high-tech products held steady. Food producers continued to note selling price increases that reflected rising input costs, but added that they will likely not be able pass on cost increases in the future. Most transportation service firms, including airlines, reported lower fuel costs.
The price of West Texas intermediate crude oil fell sharply over the reporting period, resulting in a notable decline in gasoline and diesel prices. The price of natural gas dropped slightly as well, reflecting rapid growth in inventories.
Labor Market
Employment at most firms held steady or increased since the previous report, and contacts continued to note difficulty in finding skilled workers, particularly in areas where the energy sector was booming. Reports of hiring came from accounting, legal, and staffing services firms and from food product, cement, fabricated metal, petrochemical, and transportation equipment manufacturers. Retailers also noted holiday-related hiring. Residential construction contacts continued to report labor shortages, and energy contacts saw no relief from the tight labor market, especially in West Texas. Financial firms reported greater difficulty in finding workers than in the past, and one law firm said they were increasingly losing mid-level lawyers to in-house counsel job offers from other companies.
Upward wage pressures continued to be widespread, particularly for skilled labor. Upward wage pressures were reported for truck drivers, auto technicians, engineers, and for technically skilled workers in construction and food manufacturing. One primary metals manufacturing firm gave a five percent raise to all of its employees, and some construction-materials manufacturers noted an uptick in wage pressures. High-tech manufacturers said overall wage pressures eased since the previous report, though several contacts continued to note upward pressure for employees with certain technical skills.
Manufacturing
Reports from manufacturers were mostly positive, with only a few noting slowing growth in demand. Cement producers noted improved demand, with one contact saying that demand resulting from industrial and commercial building activity was particularly robust. Lumber and brick manufacturers said sales grew at a slower pace since the last report. Fabricated metals manufacturers saw a broad-based increase in demand that resulted from strength in both energy-related work and in highway, commercial, and industrial construction. Reports from primary metals producers were mixed, with most contacts noting slightly higher sales but with one respondent reporting notably weaker demand.
High-tech and transportation equipment manufacturers noted stable demand over the last six weeks, and outlooks were positive. Food producers said demand was unchanged, ignoring seasonal effects, over the reporting period, and noted increased optimism in their outlooks. Gulf Coast chemical producers reported higher production rates, with the end of several planned and unplanned plant outages. Domestic sales of PVC and polyethylene were strong, while export demand for these products declined. Refinery utilization rates along the Gulf Coast, while still high, decreased slightly in October. Refiners' margins remained healthy, and outlooks among refiners and chemical producers were positive.
Retail Sales
Retail demand growth fluctuated over the last six weeks. Sales were sluggish during the earlier part of the reporting period, but the unusually cold weather led to a strong acceleration in demand toward the end of the reporting period. Strength was noted in home, jewelry, cosmetics, and winter-weather related merchandise. Three national retailers said demand in Texas continued to outperform the national average. Outlooks for the remainder of the year were positive, and contacts expect low single-digit increases in sales next year.
Automobile sales reports were mixed. One contact noted an all-time record sales month in October; however, others noted slightly softer demand recently. Year-over-year demand was up. Outlooks were optimistic, with contacts expecting sales growth in 2015 to be as strong as in 2014.
Nonfinancial Services
Demand for staffing services was flat to higher since the previous report. Houston and Dallas–Fort Worth continued to be the strongest markets, and most contacts said that workers at all skill levels were in high demand. One contact reported that while direct hiring was stronger, orders for temporary and contract workers were growing as well. Demand for accounting services fell, reflecting a normal seasonal downturn, but contacts noted that insurance firms were continuing to provide a healthy pipeline of work. Legal firms noted a slight increase in activity over the last six weeks. Work related to mergers and acquisitions picked up, while demand for legal services from oil and gas companies slowed in response to increased uncertainty regarding future oil prices. Litigation activity remained sluggish, but real estate and intellectual property work continued to be strong.
Transportation service firms said changes in overall cargo volumes were mixed, but outlooks continued to be positive. Trucking firms reported strong demand, but said that cargo volumes were even with last year's levels. Shipping cargo volumes increased, boosted by notable growth in steel tonnage. Air cargo volumes fell but were up sharply from year-ago levels. Airlines said passenger demand held steady since the previous report. Domestic demand remained strong and outlooks were positive.
Construction and Real Estate
The District's housing sector softened slightly during the reporting period. Slower growth in home sales was partly attributable to seasonal demand changes, although some of the weakening was attributed to higher home prices as well. Two contacts said that builders were not purchasing lots as readily as they have in the past. Outlooks were mostly optimistic, but a few contacts noted concerns about price affordability and the potential impact of an increase in mortgage rates on housing demand. Apartment demand remained strong, keeping occupancy rates high and rent growth solid in most major Texas metropolitan areas. Outlooks were generally positive, but contacts expect rent growth to slow in the near term.
Office and industrial leasing activity was mostly unchanged from the previous report. Investor interest in commercial properties, including foreign capital investment, stayed solid. Outlooks were generally optimistic, although there was some concern about the potential effect of declining oil prices.
Financial Services
Overall loan demand expanded slightly during the last six weeks. Real estate lending increased, with strength noted in demand for construction loans for single-family and multifamily building activity. Consumer lending rose slightly, particularly for auto loans, while financing for medium-sized businesses held steady. Respondents noted increased optimism as year-end figures pointed to solid growth in 2014, although some contacts whose clients are in oil and gas production said they expect a possible slowdown in business because of declining oil prices.
Energy
Demand for oilfield services continued to grow in the Eleventh District. Growth in Texas drilling activity was concentrated in the Permian Basin in West Texas; drilling activity outside of the Permian Basin was little changed. Outlooks for next year, though still positive, were less optimistic than in the prior report, and contacts said that budgets were being revised and capital expenditures are expected to decline in response to lower oil prices.
Agriculture
Recent rainfall improved soil moisture, although drought conditions remained severe in some northern parts of Texas. Harvesting wrapped up for most spring crops. Yields were generally strong and well above 10-year averages. Improved conditions for cotton allowed for more acres to be harvested this year than in the recent past, although the rains during harvest time have had an adverse effect on cotton quality. Dairy producers have had a tremendous year with good margins, but milk and dairy prices have fallen lately, reflecting shrinking exports and increased world production.