Federal Reserve Bank of Dallas
Summary of Economic Activity
The Eleventh District economy continued to expand moderately over the reporting period. Growth resumed in manufacturing output and activity picked up in nonfinancial services and retail. Bank loan volume expanded, and banks reported increased demand for loans despite continued credit tightening. Home sales increased slightly, while energy activity was steady. Overall employment rose slightly in December, although manufacturing employment was flat. Wages and prices grew moderately. Demand for nonprofit services remained high amid uncertainty regarding government funding. Outlooks continued to improve although there was concern regarding potentially adverse effects of future immigration and trade policies.
Labor Markets
Employment rose slightly in December. Services employment increased led by education and health services, while employment fell in trade, transportation, and utilities and information services. Manufacturing employment remained flat as job gains in durable goods were offset by losses in nondurable goods manufacturing. According to a Dallas Fed survey, about a third of firms are looking to hire either for new positions or replacement, while around two percent are laying off workers, both percentages remained steady since August.
Contacts reported an adequate supply of low-skilled labor, but a tight supply of skilled workers. One firm is looking to hire remote workers abroad to meet its need for skilled workers and another firm noted increasing wages to retain talent. A third contact noted that their firm's growth is being held back by the struggle to find high-quality employees. Energy contacts stated that while overall hiring was on pause, exceptions were being made for certain skilled positions. Wage growth remained moderate, but firms anticipate wage growth to be slower in the upcoming year than it was in the past 12 months.
Prices
Prices increased at a moderate pace over the reporting period. Selling and input prices grew moderately in services, while slowing to a modest pace in manufacturing. Contacts broadly noted that potential tariffs would raise input costs, and, in response, several firms anticipate passing through the increased cost to consumers. Firms plan to raise selling prices by more than they did in 2024 although input prices are expected to grow more slowly.
Manufacturing
Manufacturing activity grew modestly in December, led by gains in computer and electronic product and food manufacturing. Manufacturers reported no growth in new orders, though many expect an increase in demand in the first half of 2025. A Dallas Fed survey showed that two-thirds of manufacturers are acting ahead of the anticipated tariffs, by raising prices, finding new suppliers, and in housing production or processes. Outlooks continued to improve in December but were tempered by concern about changes in domestic policy.
Retail Sales
Retail sales grew robustly in December driven by increased revenues for retailers and nondurable goods wholesalers. Meanwhile, durable goods wholesalers saw net declines. Auto dealers reported a modest increase in sales, although a few contacts noted that margins continue to remain under pressure. Overall outlooks remained positive with some contacts citing optimism about the implementation of business-friendly policies by the incoming administration.
Nonfinancial Services
Nonfinancial services activity continued to grow moderately over the reporting period. Revenue growth was led by trade, transportation, and utilities as well as professional and business services. Revenues fell in information and leisure and hospitality. A transportation services firm reported a small increase in parcel volumes, while another contact noted that despite slow growth, overall parcel volumes in 2024 will match the 2022 record-breaking level. Demand for air travel remained strong driven by leisure travel. Despite this, one airline industry contact reported not planning to increase capacity to keep upward pressure on airfares. Moreover, to further improve margins, the airline plans to implement cost cutting measures such as reducing discretionary spending and improving workforce efficiencies. Nonfinancial services outlooks remained positive in December, and most firms expect an increase in revenue over the next six months. However, many contacts expressed concern about the negative impact of some anticipated domestic policy changes.
Construction and Real Estate
Housing contacts noted mixed activity, with some reporting meeting or exceeding sales expectations while others citing sluggish demand. Homebuilders continued to offer incentives to capture sales. Home inventories inched upward, and elevated mortgage rates and high home prices continued to challenge affordability. Outlooks were cautiously optimistic.
Commercial real estate activity was stable during the reporting period. Apartment leasing was seasonally slow, and rents were flat to down as apartment operators remained focused on maintaining occupancy. Office leasing demand picked up in some markets but remained subdued overall. Industrial activity was characterized as solid, and rents rose modestly.
Financial Services
Loan volume accelerated sharply in December. Credit tightening continued, but loan pricing declined, both at the same pace as six weeks ago. Loan nonperformance rose but at a slower pace. In addition to swift growth in loan demand, bankers reported a sizeable pickup in general business activity for the first time in over two years. Meanwhile, bankers' outlooks turned even more optimistic. They expect rapid improvement in loan demand and business activity and just a mild deterioration in loan performance six months from now.
Energy
Oilfield activity was largely flat over the reporting period. Contacts noted that oil prices in early 2025 were not expected to support an increase in production. A lower price outlook than a year ago, rising productivity, and ongoing M&A activity are expected to keep a lid on production capex growth, if there is any. Exploration and production contacts noted that M&A activity is expected to remain healthy through 2025 resulting in some further layoffs though most operations are "operating as lean as they can already." Job losses are also expected by oilfield services contacts primarily in natural gas producing regions. Narrowing margins are being driven by consolidation among their customers, and rising insurance costs. Due to this narrowing, investment in equipment is expected to remain at "maintenance levels."
Agriculture
Drought conditions retreated in parts of the district and remained present in others. Conditions improved in the cattle sector with more ample grazing—thanks to recent rainfall—and significantly higher calf prices. Row crop producers faced financial struggles in 2024 with largely unprofitable crop prices, and contacts expressed continued financial concerns heading into the new year. The winter wheat crop is a bright spot looking ahead, with strong production prospects and solid demand. Several contacts noted concern about disruption from potential retaliatory tariffs on agriculture exports.
Community Perspectives
Nonprofit service providers reported a sustained high level of demand for social services. This comes at a time of heightened uncertainty regarding future funding from state and federal governments and possible changes in eligibility for social assistance programs. Nonprofits are looking for alternative sources of funding, as a result. An El Paso contact noted that if changes in eligibility require more work hours, the resulting influx of generally low-skilled workers into a saturated labor market will suppress wages. Another contact reported that close to half of the families they serve lost childcare benefits recently because they could not find a job within the required time. In higher education, 2024 community college enrollment exceeded pre-pandemic levels. In addition, many community colleges have surpassed performance expectations, and thus, will receive additional funding in 2025.
For more information about District economic conditions visit: https://www.dallasfed.org/research/texas.