The Texas economy slowed last month with fewer service companies reporting increases in revenue and more manufacturers reporting declines in new orders, according to surveys by the Federal Reserve Bank of Dallas.
August was the third consecutive month that declines in new orders surpassed increases among manufacturing firms surveyed by the Dallas Fed.
The survey results are the latest signs foreshadowing a potential slowdown in the Texas economy. The state recovered all the jobs lost in the pandemic late last year, well ahead of most states and the nation, and Texas has been expanding ever since.
In comments to the Dallas Fed, many executives cited the impact of inflation and the pandemic’s continuing challenges in the workplace.
“We can only charge guests so much for a meal, but our costs for everything are skyrocketing,” said a restaurant executive, who added that property and liability insurance rates had increased 130%. “This is unsustainable.”
In general, staff productivity remains low, said the leader of a professional and technical services company. “We are still having difficulty picking up the pace to pre-pandemic levels,” the executive said. We are “seeing many more requests for time off and interruptions to deal with personal, family or child care problems.”
“Increasing interest rates and capital costs are crushing margins,” said a real estate company leader. “Revenue, though increasing, is not at the same pace as expenses.”
Just over 30% of Texas service firms said August sales were higher than July’s, a slightly smaller share than the previous two months. Over 23% said August sales were lower — the highest negative score on that measure since January.
Labor market indicators softened last month with fewer service companies reporting an increase in hiring. And average hours worked increased at the slowest pace since early 2021.
“We’re seeing signs of slowing, but we’re still growing,” said Christopher Slijk, an associate economist at the Dallas Fed. “Manufacturing is coming in much weaker and there are not a lot of new orders. But the service sector is still hanging in there.
“Nothing really suggests a recession — that we’re in one or that it’s necessarily on the horizon,” Slijk said.
Many businesses are worried about a downturn, and some are reducing hiring plans or even imposing layoffs. One restaurant executive said growth was strong earlier in the year but sales had plateaued since June.
“Are we beginning to feel the talked-about recession? Hard to tell — hope not,” the restaurant exec told the Dallas Fed.
The steady decline in manufacturing orders may be part of a broader recovery from the pandemic. In the early months of COVID, when workers were staying home for safety, they bought lots of goods, which led to an expansion in manufacturing. As more people were vaccinated and the health threat eased, they started flocking to services again.
“There was really a shift in consumer spending,” said Daniel Altman, chief economist at Instawork, a platform that connects workers with temporary assignments in restaurants, hotels and more. “It started around April. People decided they were going to go out and consume services, and we saw strong increases in pay for roles in leisure and hospitality. But that started to tail off in the last month or so.”
Instawork’s pay signal index hit 63 in July for the Dallas market, indicating most employers were raising pay to land temporary staff. The index dropped to 49 in August, suggesting a more balanced environment with some slack in that portion of Dallas’ labor market.
It’s not surprising, Altman said, that consumers would start pulling back amid rising prices and growing economic uncertainty.
“They tend to cut back on nonessential purchases,” Altman said. “Those tend to be related to entertainment, restaurant meals and hotel stays. Those are some of the first things to get cut back during a downturn.”
Supply-chain problems, which have persisted through much of the pandemic, appear to be easing. In August, 58.5% of respondents reported supply-chain disruptions or delays. That’s down from nearly 70% in November and 65% in May, according to the Dallas Fed.
Such improvements are expected to shorten the backlog for manufactured goods and reduce some pricing pressure, Slijk said: “If we keep easing these supply constraints, that will grease the gears a bit so the economy keeps running more smoothly,” Slijk said.
There’s also optimism about growth in the near future. Over half the service firms expect to report higher revenue in six months compared with less than 12% expecting a decline, said the Dallas Fed surveys.
A high share of firms also projects gains in wages, selling prices, employment and capital spending.
“Going into 2023, they’re pretty optimistic things are going to chug along and be healthy,” Slijk said, noting that such expectations are not inconsistent with the Texas economy moderating or even creating some short-term pain.
One of the economy’s continuing strengths is the labor market. In August companies were still eager to hire, with those adding workers outnumbering those cutting back by roughly 2-1, according to the Dallas Fed.
A hotel company said it was short by roughly 50 staff members and was especially challenged to fill positions in its food and beverage department.
A professional services firm said profit margins were shrinking because of inflation, a drop in productivity and workplace interruptions from health and child care problems: “A lack of qualified and experienced applicants continues to hold back our capacity to grow,” the executive said.
An administrative services company struck a similar chord: “Labor, labor, labor. We cannot find any new hires.”
