Federal Reserve Bank of Dallas · Beige Book

Federal Reserve Bank of Dallas

Summary of Economic Activity

Economic activity in the Eleventh District was little changed over the reporting period. T1Growth in the manufacturing sector slowed to a modest pace, and activity contracted slightly in nonfinancial services. Retail sales fell. Housing market activity remained weak, and drilling activity and oil production were flat. Loan volume and demand rose modestly. Employment fell, and wage growth was modest. Price pressures were elevated in manufacturing, but subdued in the service sector, where firms expected selling price increases to accelerate over the next 12 months. T2Outlooks worsened with weakening demand, T3domestic policy uncertainty, and inflation cited as primary concerns going forward.

Labor Markets

T4Employment fell over the reporting period. Staffing firms reported slow activity as firms remained cautious with hiring and professionals were reluctant to switch positions. Head counts dipped further in the energy sector as companies continued to find ways to complete more wells in less time and with fewer people. Homebuilders and nonprofits noted trimming head counts. Overall, wage growth was modest. Firms expect wage growth to slow to 3.4 percent over the next 12 months, down from 3.8 percent over the past 12 months.

Prices

T5Selling prices increased slightly overall, while rising more sharply in the manufacturing sector due to the widespread impact of tariffs. A computer manufacturer reported that U.S. customs was applying steel and aluminum tariffs to products that do not contain these metals and that challenges to these tariffs were taking time to resolve. A professional and business services firm reported that health-care and business insurance premiums were rising faster than revenues. Service firms expect selling price increases to accelerate over the next 12 months, while manufacturing executives expect price growth to remain steady.

Manufacturing

Factory output growth slowed to a modest pace during the reporting period, and new orders dipped. Output growth abated for most durable goods, with machinery and transportation manufacturing being the bright spots. Among nondurables, food manufacturing continued to see strong gains, while chemical production held steady as trade policy and global oversupply put downward pressure on export demand for basic chemicals. Gulf Coast refineries cited a dip in production levels stemming from seasonality and unplanned outages. Contacts noted that steady global demand amid ongoing refinery closures and unplanned outages in Russia and Iran had propped up margins for refined products over the summer, especially for diesel and jet fuel. Perceptions of broader business conditions worsened in manufacturing as slowing demand, inflation, and domestic policy uncertainty continued to weigh on outlooks.

Retail Sales

T6Retail sales fell during the reporting period. Building material and garden equipment, furniture, and electronic and appliance stores saw lower sales, while health care and food and beverage retailers reported flat to slight increases in activity. Auto dealers reported weak sales and tighter margins due to higher costs. Overall retail inventories remained steady. Outlooks were pessimistic and tariffs appeared to be one of the primary drivers of uncertainty among contacts.

Nonfinancial Services

Activity in nonfinancial services contracted slightly during the reporting period. A pickup was seen in professional and business services and transportation and warehousing, while health care, information, and leisure and hospitality exhibited weakness. Port traffic and small parcel shipments volumes rose, according to contacts. Airlines reported broad-based increases in passenger demand, highlighting domestic travel as a source of strength. Demand for staffing services was stable, and outlooks were optimistic, attributable to clients having unspent budgets for 2025 as they have been holding off on hiring for longer than usual. Service sector outlooks worsened, and uncertainty remained a headwind.

Construction and Real Estate

T7Housing market activity remained weak. Foot traffic and sales continued to be choppy and lackluster despite the recent dip in mortgage rates. Home inventories fell slightly during the reporting period but remained elevated. Builders noted ongoing reliance on marketing and incentives, including discounting and mortgage rate buydowns, to close deals. Home starts slowed further, and vacant developed lot supply was rising. Outlooks remained pessimistic amid sluggish demand and elevated economic uncertainty.

Commercial real estate activity improved. Apartment demand was steady, but elevated supply of new units has made leasing competitive and kept rental rates under pressure. Office leasing improved, and contacts said there appeared to be more signs of stability. Industrial and retail activity remained solid. Outlooks remained cautious. Firms were signing short-term leases because of heightened uncertainty, and investment sales activity continued to be limited.

Financial Services

Loan volume and demand increased in September. Credit tightening continued, but loan pricing declined. Credit standards and terms eased slightly for residential real estate loans while tightening continued for the remaining loan types. Over the next three months, bankers expect to tighten credit standards for all loan types except residential real estate, which are expected to be unchanged. Overall loan performance deteriorated slightly; however, loan performance for commercial real estate sharply improved. Bankers reported stable general business activity. Bankers' outlooks are mixed. Survey respondents expect an acceleration in loan demand and increasing business activity six months from now but a moderate deterioration in loan performance.

Energy

Drilling and well completion activity was flat over the past six weeks. T8Producers remained concerned about low oil prices, and reiterated that without a material increase in prices, U.S. crude production would erode in 2026. Breakeven costs for wells were rising due to increases in input costs. An oil field service contact noted there were "a lot of rigs stacked in yards waiting to become spare parts." Several firms noted project delays due to low oil prices and an uncertain policy environment, but pipeline contacts were optimistic about their project pipelines crediting regulatory relief and favorable tax policies.

Agriculture

Growing conditions remained favorable overall. Harvest was wrapping up for spring row crops, with production and yields generally coming in strong. Many cotton growers were expecting their best harvest in three to four years, a positive development for them and downstream industries like warehouses, ginning, and transportation. However, cotton and grain prices remain sub-profitable in many cases. A contact said government price support programs and crop insurance were important safety nets in this environment. Cattle prices stayed high, with demand remaining strong and supply continuing to be constrained by the suspension of cattle imports from Mexico in response to the spread of New World screwworm there. Agriculture outlooks are weighed down by the increased likelihood of a La Niña climate pattern this winter, which typically brings warmer, dryer weather.

Community Perspectives

Nonprofits continue to see elevated demand for a broad range of social services. Food and utility assistance remained key needs, while demand for rental and housing assistance increased. One contact noted that evictions were on the rise. Underemployment was an emerging issue. Funding remains a concern for nonprofits, and some are exploring alternate revenue streams. An agriculture nonprofit noted recording live webinars to expand its eLearning offerings and plans to charge a nominal fee for access. Likewise, a large nonprofit organization is selling high-value products on an e-commerce site, allowing it to reach more consumers than their brick-and-mortar stores.

For more information about District economic conditions visit: https://www.dallasfed.org/research/texas.