24/7 Wall St.

For years Texas was one of the stronger driving forces of the U.S. economy. The rise of energy spread a long way, but it turns out the persistent weakness in energy has continued to pressure the economy now. Some people might even wonder if everything still is really bigger in Texas.

This week’s Beige Book release from the Federal Reserve was full of dampening comments about growth in the United States. In fact, the term “moderate” appeared 63 times and the term “modest” appeared 81 times. That is of course in the national data, and 24/7 Wall St. wanted to show what this might mean for the regional data.

It is important to realize that the Beige Book is not actually Federal Reserve data. It is based on surveys and discussions with outside businesses and other contacts. That makes the data less official, but perhaps more in line with the street-level operators rather than academics.

As far as what the Dallas regional survey said, which is mostly pertaining to Texas, economic activity expanded slightly over the past six weeks. The regional data showed that manufacturing activity was flat to up, and showed that demand for nonfinancial services increased.

Retail sales declined slightly on a net basis, although automobile sales remained strong. Auto dealers noted manufacturer incentives increased over the reporting period, pushing down the final price for consumers. More retail sales data were cited as follows:

Retail sales demand weakened slightly over the reporting period, and Texas remained the worst performing market in the nation according to two national retailers. Inventories are down year-over-year, in line with contacts’ targets. Outlooks were less optimistic than during the last reporting period, although some improvement is expected over the next six months.

Agricultural conditions were favorable, although crop prices remained low. On the agriculture efforts in the Texas region, the Beige Book said:

Strong crop production prospects materialized into above-average yields for several crops, with double-digit increases expected for the 2016 cotton, corn and soybean crops. This will help offset some of the negative impact of low crop prices for farmers. Livestock grazing conditions have been very good this year, which, coupled with low grain prices, has reduced feed costs. Dairy producers benefitted from a marked rally in dairy prices over the past six weeks.

Demand for oilfield services remained depressed, but contacts expect conditions to improve through the end of the year and into 2017. Several contacts said they believe the worst of the oil bust slump has passed, but that economic growth has not yet returned to normal levels. Fuel and chemical prices in the Gulf Coast were flat to down over the past six weeks due to large inventories and relatively tepid demand. More oil data were shown as follows:

Refinery utilization rates remained very healthy in spite of softening profit margins. Flooding in Louisiana was not expected to have a significant impact on refining or petrochemical output overall.  Gulf Coast chemical production was largely unchanged and continued to face headwinds from a strong dollar and softening global demand.

Reports of employment changes were mixed and prices held steady. Outlooks were generally positive but cautious, with the upcoming presidential election driving some of the uncertainty. Manufacturing and energy services firms continued to trim payrolls, and the retail sector’s employment was flat to down. Hiring was scattered among service sector companies with staffing firms adding employees and hiring continuing among leisure and hospitality firms. There were also said to be tight labor market for health care professionals, and labor constraints in the construction sector were ongoing.

Inflation remains elusive on many fronts. Input costs were flat to up, with slightly more upward pressure than during the prior period, but selling prices were mostly flat.

The manufacturing sector was shown to have stabilized over the reporting period, some even noting a demand recovery. Construction-related manufacturers continued to see steady demand (stronger in the Dallas-Fort Worth market but mixed signals in Houston). High-tech manufacturing demand picked up modestly and demand was also up slightly among food manufacturers.

Then there is the catch-all bucket in the demand for nonfinancial services. This was shown to have expanded over the past six weeks. The regional data were represented as follows:

Staffing services firms said demand picked up, particularly in Dallas, and a slight uptick was seen in Houston as well. Leisure and hospitality contacts said demand was mixed. Restaurants saw continued growth overall, with some signs of recovery in oil and gas areas. Hotel demand softened toward the end of the summer season. The outlook for the leisure and hospitality industry was positive, with restaurants expecting moderate to strong sales growth to continue through the end of the year, while hotels were more mixed in their expectations.

Shipments and cargo volumes were generally down over the reporting period. This was led by declines in petroleum shipments, and low fuel prices continued to impact sales in the public transportation industry. One issue that stood was this: one contact noted that the freight trucking industry was negatively affected by the energy bust leading to excess trucks on the market.

Real estate activity was flat to up in most markets. Loan demand was shown to have remained soft. Real estate commentary was listed as follows:

Reports on home sales and buyer traffic were mixed over the reporting period. Overall, sales of low to mid-priced homes remained strong. Some contacts noted increased competition among builders of move-up product, while demand softened at higher price points. Home prices were elevated, although there were several reports of discounting in Houston. Outlooks were positive through yearend with the exception of Houston, where contacts expect continued weakness in sales and starts.

Apartment leasing activity and rent growth was solid in most major Texas metros. In Houston, however, rents were flat to down, and up to three months of free rent was being offered in some areas. Multifamily construction continued to be elevated in Dallas-Fort Worth but is tapering off in Houston. Some contacts noted general tightening in multifamily construction lending, while one noted strong investment sales in Dallas-Fort Worth.

Demand for office space was steady in Dallas-Fort Worth and rents continued to edge up, while contacts in Houston noted slow leasing activity and continued increases in sublease space–which is currently well above its historical average. Office rents were flat to down in Houston. Industrial leasing was mixed in Houston, while retail demand and construction remained active.

As a reminder, the Dallas Fed is the Eleventh District (of 12). It also expands beyond just Texas, covering all of Texas, northern Louisiana and southern New Mexico.