Eleventh District Beige Book – Dallasfed.org

Reports on regional economic activity

Summary of economic activity

The Eleventh District economy grew slightly during the period. Activity in the nonfinancial services, finance, and energy sectors increased. Manufacturing output stagnated while retail and home sales declined. Agricultural conditions improved and demand for nonprofit services increased. Employment rose slightly and wage growth remained moderate. Selling price growth increased in manufacturing but remained subdued in the services sector. The outlook improved but remained neutral to pessimistic, with weaker demand, domestic policy uncertainty, and inflation cited as key concerns.

Labour markets

Employment has increased slightly over the past six weeks. Staffing firms noted a broad-based increase in hiring, including in human resources and marketing, but some companies said hiring was on hold in part due to the uncertain economy. Oil and gas companies reported a slower hiring pace and some layoffs as the industry consolidates. Some companies said it was difficult to fill certain skilled positions, while one staffing firm described the job market as an “employer’s market.”

Wage growth remained generally moderate. Staffing agencies said wage pressures had eased and some firms were pushing for lower starting wages. A survey conducted by the Dallas Fed in June found that Texas companies expect average wage growth of 3.5 percent over the next 12 months. This is down from 4.9 percent over the past 12 months.

Prices

Prices rose at a modest to moderate pace during the period. While manufacturing saw an acceleration in finished goods prices, cost and selling prices in the services sector, including retail, were below average. Home prices remained broadly stable, but some contacts indicated price discounts. Some firms noted customer resistance to price increases, and one professional services firm spoke of price pressure from competitors due to slowing demand. Over the next 12 months, contacts expect input costs to rise 3.7 percent, but plan to increase prices 2.8 percent.

Manufacturing

Manufacturing activity in Texas stabilized in June after declining slightly in May. Some weakness continued in durable goods, particularly primary metals, metal fabrication and machinery. However, production increased moderately in computers and transportation. In nondurable goods, food and chemical manufacturers saw a significant increase in orders and Gulf Coast refineries reported robust utilization rates. The outlook for manufacturing improved but was still weak, with weak demand, election uncertainty and increased input costs cited as key constraints.

Retail sales

Retail sales declined modestly over the past six weeks. The weakness is partly due to seasonality and partly due to higher prices and credit costs that have dampened consumer demand. Food and beverage stores saw modest sales increases, while auto dealers and brick-and-mortar retailers reported declines. Overall, the outlook for retail remained negative.

Non-financial services

Activity in the services sector increased slightly during the period, with contacts noting that economic uncertainty and high prices were holding back demand. Sales growth was particularly strong in transport services. Airlines said leisure travel continued to represent the largest demand for passengers and business travel was steadily increasing. Small parcel services saw a modest increase in shipments and air cargo volumes remained stable thanks to strong domestic demand. Activity in professional and business services and information services increased and recruitment firms reported a broad-based rebound in demand for their services. In contrast, sales in healthcare and leisure and hospitality showed weakness. The outlook was less pessimistic but was still weighed down by weaker demand, domestic political uncertainty, inflation and high interest rates.

Construction and real estate

Demand for housing eased during the period, with contacts reporting a drop in sales and traffic as mortgage rates hovered around 7 percent. Builders said they had a good backlog of orders, but the spring selling season ended earlier than usual. Incentives such as price discounts and interest rate cuts remained widespread, squeezing margins.

Activity in the commercial real estate market was little changed from the previous reporting period. Residential leasing increased, but increased supply continued to put downward pressure on occupancy rates and rents. Office leasing activity remained sluggish and focused primarily on prime space. Retail and industrial demand grew moderately, and rents remained stable or increased. Outlook was cautious, with certain commercial market segments expected to remain challenging due to weak demand, high interest rates, election uncertainty, access to financing and/or increased supply.

Financial services

Loan volumes grew faster in June as loan demand increased despite further tightening of lending standards. Credit tightening slowed for all loan types except consumer loans, and loan price increases moderated. However, bankers expect credit tightening for commercial real estate loans to accelerate over the next three months, particularly for office, hotel and multifamily loans. Loan defaults continued to rise, particularly in consumer and commercial and industrial loans. Nearly half of bankers reported an increase in deposits, and slightly more expect deposits to increase over the next six weeks. Bankers’ outlook remains mixed; they expect loan demand to increase six months from now but loan performance and business activity to deteriorate, although expectations of a decline have moderated toward stabilization.

energy

Oilfield activity was flat or slightly up during the period. Oil and natural gas production was broadly flat, while oilfield service activity increased. Oil prices are expected to be well above breakeven levels by the end of 2024, but natural gas pricing remains challenging due to an oversupply of associated gas production in the Permian Basin. Several contacts, particularly smaller exploration and production companies, indicated that low natural gas prices would hamper their drilling and completion plans for the remainder of the year. In contrast, some contacts expect an increase in their production activity this year, supported by new natural gas pipeline capacity.

Agriculture

Crop and pasture conditions have generally improved as most areas have received adequate rainfall, particularly early in the period. Livestock numbers have been good as abundant pasture and hay have meant little or no need for supplementary feeding, and livestock prices have continued to rise. Expected row crop production is promising as moisture conditions are much more favorable than last year. However, crop prices have fallen to levels below production costs for many producers, even at average yields.

Community perspectives

Nonprofit service providers noted an increase in demand attributed to the severe weather in late May. Some contacts reported difficulties serving their clients because their own organizations suffered damage and power outages. One contact noted that the storm-related revenue losses are forcing some vulnerable small businesses that already operate on thin margins into bankruptcy. Housing affordability continued to be cited as a top concern among low- to moderate-income households who are relocating further out of town in communities that lack reliable transportation, creating commuting challenges. Contacts noted that housing affordability also impacts the recruitment and retention of workers, including nurses, EMTs, and teachers. On the housing front, a nonprofit executive said they cannot build affordable housing units fast enough to meet demand, largely due to increased capital costs and a lack of bridge financing.