Analysis: Oil and gas figures prominently in U.S. national economic outlook


[Context: On May 30, the US Federal Reserve issued the latest version of its Beige Book, which is a federal district by federal district overview of economic activity. The U.S. oil and gas industry figured prominently in the report for multiple districts. Below is the complete Dallas Fed entry and excerpts from other districts.]

Federal Reserve Beige Book – May 30, 2018

Overall Economic Activity
Economic activity expanded moderately in late April and early May with few shifts in the pattern of growth. The Dallas District was an exception, where overall economic activity sped up to a solid pace. Manufacturing shifted into higher gear with more than half of the Districts reporting a pickup in industrial activity and a third of the Districts classifying activity as “strong.” Fabricated metals, heavy industrial machinery, and electronics equipment were noted as areas of strength. Rising goods production led to higher freight volumes for transportation firms. By contrast, consumer spending was soft. Nonauto retail sales growth moderated somewhat and auto sales were flat, although there was considerable variation by District and vehicle type. In banking, demand for loans ticked higher and banks reported that increased competition had led to higher deposit rates. Delinquency rates were mostly stable at low levels. Homebuilding and home sales increased modestly, on net, and nonresidential construction continued at a moderate pace. Contacts noted some concern about the uncertainty of international trade policy. Still, outlooks for near term growth were generally upbeat.

Employment and Wages
Employment rose at a modest to moderate rate across most Districts. Again, the Dallas District was the exception, where solid and widespread employment growth was reported. Labor market conditions remained tight across the country, and contacts continued to report difficulty filling positions across skill levels. Shortages of qualified workers were reported in various specialized trades and occupations, including truck drivers, sales personnel, carpenters, electricians, painters, and information technology professionals. Many firms responded to talent shortages by increasing wages as well as the generosity of their compensation packages. In the aggregate, however, wage increases remained modest in most Districts. Contacts in some Districts expected similar employment and wage gains in the coming months.

Prices rose moderately in most Districts, while the remainder reported slight or modest increases. There were several reports of rising materials costs, notably for steel, aluminum, oil, oil derivatives, lumber, and cement. A few Districts noted that these reports of rising materials costs were becoming more common across contacts. Input cost increases, along with labor shortages in some sectors and strengthening demand, put upward pressure on prices in the transportation, construction, and manufacturing sectors. Some Districts also noted that their retail contacts were more able to pass along price increases to their customers than in the recent past.

Federal Reserve Bank of Dallas

Summary of Economic Activity
The Eleventh District economy expanded at a solid pace over the past six weeks. Growth in manufacturing increased. Expansion in the energy and service sectors continued at about the same pace, while retail spending was mixed. Home sales continued to rise but apartment markets softened slightly. Hiring was solid across most sectors, and widespread labor shortages continued. Wage and price pressures remained elevated, and several contacts noted a sharp rise in the cost of steel and aluminum. Outlooks remained fairly optimistic, but tariffs and trade-related concerns were creating uncertainty.

Employment and Wages
Employment growth was solid and widespread across sectors. Labor market tightness continued across a wide range of industries and skill levels, with some contacts saying difficulty finding workers was constraining growth to some extent. One staffing services contact noted that some firms were rehiring former retired employees on a part-time basis to meet their staffing needs. In Houston, shortages of painters, tile setters, carpet layers (workers at the backend of the home construction cycle) were noted, a departure from earlier in the year when mostly sheet rock/drywall installers were in short supply. Up-stream energy firms said all skill levels were in short supply, but shortages were most acute for skilled workers.

Wage pressure remained elevated and picked up particularly among manufacturing firms. A large share of respondents noted increasing wages to recruit and retain employees. One contact reported offering large bonuses for trades, such as machinists and welders, who were willing to commit to stay for three years. A health care firm cited high vacancy rates for registered nurse positions.

Price pressures remained elevated. Raw material prices and other input costs continued to climb, but several firms noted they had limited ability to pass on higher costs to customers. Input cost pressures increased among energy, manufacturing, and construction firms, in part due to the new tariffs on lumber, steel and aluminum. Upstream energy firms expressed concern about the new tariffs adversely affecting their operations and costs in the near term. One energy contact reported a sharp rise in rates of drilling rigs. Some auto dealers cited a higher-than-average increase in used-vehicle prices, and transportation service firms noted rising fuel costs. Gasoline and diesel prices rose, driven largely by higher crude oil prices, while the average price for natural gas dipped during the reporting period.

Growth in the manufacturing sector strengthened after having slowed in the prior reporting period. Output growth rose, led by increases in primary metals, transportation equipment, machinery, and high tech manufacturing. Growth in food and nonmetallic mineral (stone, clay, cement and glass) production picked up. Demand for fabricated metals manufacturing increased, with one contact noting strength in oil and gas related activity. Chemical production expanded during the reporting period, and refinery utilization rates were up in April but dipped slightly in early May. Outlooks remained optimistic, although several contacts noted that the new tariffs were creating uncertainty in expectations. Refiners and petrochemical producers expressed negative views about the potential impact of tariffs and quotas on exports as well as new construction projects.

Retail Sales
Retail sales, including companywide internet sales, dipped in April but appear to have picked up in early May. Seasonal retailers attributed the decline in April sales to colder-than-normal weather. Reports on auto sales were mixed, with sales weakening slightly in San Antonio but increasing in Dallas and Houston. Sales growth among durable wholesalers was solid. Outlooks among retailers were positive on net.

Nonfinancial Services
Broad-based expansion continued in the nonfinancial services sector. Transportation services was a particular bright spot. Rail traffic was near record levels, with the increase in shipments being broad based across business lines. Courier and sea cargo volumes expanded as well, with growth in the latter being boosted by marked increases in steel shipments as shippers rushed to bring them in before the new tariffs were implemented. Reports on airline passenger demand were mixed, but outlooks remained optimistic. Leisure and hospitality contacts said spring break activity was mixed, but Easter traffic was strong along the coastal area near Houston. Revenue at professional and technical service firms rose, and staffing services firms continued to note high levels of demand, driven by widespread increases in activity across geographies and sectors. Outlooks improved, although uncertainty surrounding trade policies and rising interest rates negatively impacted some firms’ expectations.

Construction and Real Estate
Home sales rose during the reporting period, with continued strength in sales at the low- to mid-price points. Year-to-date sales were generally on or ahead of plan for builders. Buyers remained price sensitive, and builders have been focused on housing affordability. One contact noted that in Houston, some builders were downsizing homes on large lots to bring the price point down. Contacts said several new deals are not being penciled in partly due to high and/or rising land, development, and other costs. Outlooks were positive, although margin compression, climbing material costs, and rising interest rates were a concern.

Ample supply coupled with modest demand has slowed apartment rent growth in most major metros. In Houston, however, net absorption has been solid and overall rent growth has been strong as well. Some contacts noted a pickup in investment activity.

Office leasing activity and/or net absorption slowed in Dallas-Fort Worth and remained sluggish in Houston. Conditions in industrial markets were characterized as solid, while reports on retail space activity were mixed.

Financial Services
Loan volumes and demand expanded at a faster pace compared with the previous reporting period. Strong growth was seen in commercial and industrial, and commercial and residential real estate lending. Consumer loan volumes increased modestly. Credit standards remained flat or ticked down, while loan pricing continued to increase. The volume of deposits increased at a slower pace than in the last report, and a few contacts noted increased competition for deposits. Banking contacts remained optimistic as they expect both loan demand and general business activity to improve.

Energy activity continued to expand moderately. Drilling and completion activity increased in the Eleventh District, particularly in the Permian Basin. Large firms are driving growth, and it remained difficult for small exploration and production companies to expand operations despite high oil prices. Outlooks remained positive, supported by favorable oil prices, although contacts said pipeline capacity, labor, and supply chain constraints may limit further increases in production growth.

Drought conditions continued to plague much of West Texas and Southern New Mexico, particularly in the Texas panhandle. Crop conditions for winter wheat were much poorer compared with last year due to the lack of soil moisture. Row crop planting continued and crops were in mostly fair to good condition, but there was concern among producers about the dry weather potentially causing below-average yields. Given the current level of prices, grain farmers need at least average yields to be profitable this year. Cotton farmers were a bit more optimistic due to higher prices over the last six weeks and because cotton yields generally hold up better than other crops during drought. Cattle prices rose, largely due to seasonal factors but also buoyed by very strong domestic and international demand.

Commentary on Energy Outlook by other Federal Reserve Districts

Federal Reserve Bank of Atlanta

Energy sector contacts described overall industry activity as steady to up from the prior report. Onshore shale drilling activity continued to accelerate, though offshore exploration and production remained depressed. Contacts expect a record year of natural gas supply growth in 2018, which, along with growing crude supply, generated pipeline construction projects in order to increase capacity. Chemical refining companies experienced continued, steady demand. Exports of refined chemical products and crude oil continued to surge as many refineries increased capacity. Rising crude exports also reduced demand for storage needs, leading some firms to pull back from creating or constructing storage capacity. Contacts from the utilities sector noted that while industrial segment growth was up, behavioral trends among residential and commercial customers to reduce energy usage lowered electricity sales.

Federal Reserve Bank of Kansas City

District energy activity increased moderately since the last survey period with steady expectations for the future. The number of oil rigs continued to increase modestly, while the number of active gas rigs was mostly unchanged. Oil and gas production has increased and was expected to continue increasing. Activity has picked up in the Niobrara and Oklahoma shale plays. Oil prices reached their highest level since 2014, which has encouraged additional production. In Wyoming, applications for drilling permits are at record levels as producers seek opportunities to operate in the Powder River Basin. Increased oil and gas production has put pressure on energy transportation infrastructure, and new oil and gas pipeline projects have been announced for Oklahoma’s Anadarko region that should alleviate some of the pressure later in the year.

Federal Reserve Bank of Minneapolis

Agriculture, Energy, and Natural Resources
District agricultural conditions were mixed. While recent increases in some commodity prices were viewed as a positive sign, farmers were also concerned about access to international markets. Late-season snows delayed spring planting in much of the District, with crop progress well behind five-year averages as of mid-May. Activity in the energy sector continued to increase. District oil and gas exploration increased from the previous report. March natural gas production in North Dakota hit a new record, while oil production declined slightly. District iron ore mines were operating near capacity, and an idled facility was reportedly considering restarting production.