Federal Reserve Bank of Dallas
Summary of Economic Activity
The Eleventh District economy expanded slightly over the reporting period. Activity grew in the nonfinancial services, finance, and energy sectors. Manufacturing output was flat, while retail sales and home sales declined. Agricultural conditions improved, and demand for nonprofit services increased. Employment rose modestly, and wage growth remained moderate. Selling price growth picked up in manufacturing but remained subdued in the service sector. Outlooks improved although they remained in neutral to pessimistic territory, with weakening demand, domestic policy uncertainty, and inflation cited as top concerns.
Labor Markets
Employment increased modestly over the past six weeks. Staffing firms noted a broad-based pick up in hiring, including for HR and marketing roles. However, some firms said hiring was on pause in part due to an uncertain economic environment, and oil and gas companies reported a slower pace of hiring and some layoffs amid consolidation in the industry. Some firms noted difficulty filling certain skilled positions, while one staffing firm characterized the labor market as an "employer's market."
Wage growth generally remained moderate. Staffing services firms said wage pressures have eased and some firms are pushing for lower starting wages. A June Dallas Fed survey showed that Texas businesses expect wage growth in the next 12 months to be 3.5 percent, on average, down from 4.9 percent in the previous 12 months.
Prices
Prices rose at a modest to moderate pace over the reporting period. While an acceleration was seen in finished goods prices in manufacturing, input cost and selling price growth was below average in the service sector, including in retail. Home prices were largely steady, but with some contacts noting discounting. A few companies noted pushback from customers on price increases, and a professional and business services firm cited downward pricing pressure from competitors because of slowing demand. Over the next 12 months, contacts expect input costs to rise 3.7 percent but plan to increase their prices by 2.8 percent.
Manufacturing
Texas manufacturing activity stabilized in June, after contracting slightly in May. Some weakness continued on the durable goods side, particularly in primary metals, fabricated metals, and machinery manufacturing. However, output increased moderately in computer and transportation manufacturing. Among nondurables, food and chemical manufacturers saw a notable increase in new orders, and Gulf Coast refiners cited robust utilization rates. Manufacturing outlooks improved although they were still weak, with sluggish demand, election uncertainty, and elevated input costs cited as key headwinds.
Retail Sales
Retail sales declined moderately during the past six weeks, with weakness ascribed partly to seasonality and partly to elevated pricing and borrowing costs curtailing consumer demand. Food and beverage stores noted modest sales increases, while auto dealers and nonstore retailers reported declines. Overall, retail outlooks remained negative.
Nonfinancial Services
Service sector activity rose slightly over the reporting period. Contacts noted that economic uncertainty and high prices were curbing demand. Revenue growth was particularly strong in transportation services. Airlines said leisure travel continued to lead air passenger demand, and business travel was steadily increasing. Small parcel carriers saw a modest increase in shipments, and air cargo volumes remained robust, buoyed by strength in domestic demand. Activity in professional and business services as well as information services rose, and staffing firms cited a broad-based pickup in demand for their services. In contrast, revenues in health care and leisure and hospitality exhibited weakness. Outlooks were less pessimistic, but still weighed down by weakening demand, domestic policy uncertainty, inflation, and high interest rates.
Construction and Real Estate
Housing demand weakened during the reporting period. Contacts reported a decline in sales and traffic as mortgage rates hovered around 7 percent. Builders noted that they had a good backlog of orders, but the spring selling season had petered out earlier than normal. Incentives such as discounting and rate buy downs remained widespread, squeezing margins.
Commercial real estate activity was little changed from the previous reporting period. Apartment leasing picked up, but there continued to be downward pressure on occupancy rates and rents due to elevated supply. Office leasing activity remained sluggish and was primarily concentrated in class A space. Retail and industrial demand grew moderately, and rents were stable to up. Outlooks were cautious, with certain commercial market segments expected to remain challenging due to weak demand, high interest rates, election uncertainty, access to financing, and/or elevated supply.
Financial Services
Loan volumes grew at a faster pace in June as loan demand increased despite credit standards continuing to tighten. Credit tightening decelerated for all loan types except for consumer loans, and loan price increases moderated. However, bankers anticipate credit tightening for commercial real estate loans to accelerate over the next three months particularly for office, hotels, and multifamily loans. Loan nonperformance continued to rise, particularly for consumer and commercial and industrial loans. Close to half of bankers reported an increase in deposits and slightly more expect deposits to rise in the next six weeks. Bankers' outlooks remain mixed; they expect an increase in loan demand six months from now, but a deterioration in loan performance and business activity, although the expectations of a decline have moderated toward stabilization.
Energy
Oilfield activity was flat to up modestly over the reporting period. Oil and natural gas production was largely unchanged, while oilfield services activity rose. Oil prices are expected to remain well above breakeven costs through year-end 2024, but pricing for natural gas remains challenging due to an oversupply of associated gas production in the Permian Basin. Several contacts, particularly smaller exploration and production firms said 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, aided by new natural gas pipeline capacity.
Agriculture
Crop and pasture conditions broadly improved with sufficient rainfall in most areas, particularly early in the reporting period. Livestock conditions were strong with little to no supplemental feeding needed thanks to ample availability of grazing and hay, and cattle prices continued to strengthen. Expected row crop production is promising, with moisture conditions much more favorable than last year. However, crop prices have fallen to levels below the cost of production for many producers, even with average yields.
Community Perspectives
Nonprofit service providers noted an uptick in demand, stemming from the severe weather events in late May. Some contacts noted difficulties in serving clients because their own organizations suffered damage and power outages. One contact noted that the storm-related loss of income puts some vulnerable small businesses, already operating on thin margins, at risk of failing. Housing affordability continued to be cited as a top concern facing low- to moderate-income households who are locating further out from the city into communities that lack reliable transit options, creating commuting challenges. Contacts noted that housing affordability was also impacting recruitment and retention of workers, including nurses, EMTs, and teachers. On the housing development side, one nonprofit executive said they could not build affordable units quickly enough to meet demand, largely due to increases in capital costs and the lack of gap financing.
For more information about District economic conditions visit: https://www.dallasfed.org/research/texas.