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January 29, 2013

TEXAS SERVICE SECTOR ACTIVITY EXPANDS AT A SLOWER PACE


This months survey data include annual seasonal factor revisions. In January of each year, the Federal Reserve Bank of Dallas revises the historical data for the Texas Service Sector Outlook Survey after calculating new seasonal adjustment factors. Annual seasonal revisions result in slight changes in the seasonally adjusted series. Read more information on seasonal adjustment at www.dallasfed.org/microsites/research/surveys/tssos/seasonal.cfm.
Texas service sector activity expanded in January, according to business executives responding to the Texas Service Sector Outlook Survey. The revenue index, a key measure of state service sector conditions, fell from 14.9 to 8.4, suggesting slower growth. Labor market indicators reflected some employment growth, but no change in workweeks. The employment index edged down from 9.5 to 6.4, and the hours worked index was -0.2, suggesting little change in workweek length. Perceptions of broader economic conditions were less optimistic in January. The general business activity index fell from 9.7 to 5.8. The company outlook index edged down from 9.3 to 7.5, with 20 percent of respondents reporting that their outlook improved from last month and 12 percent noting they worsened. Selling prices and wages rose in January. The selling prices index was practically unchanged at 11.7, suggesting prices increased at about the same pace as December. The wages and benefits index dipped from 14.5 to 12.1 with slightly more firms noting compensation declined in January. Respondents were somewhat more optimistic about expectations regarding future business conditions than last month. The index of future general business activity advanced 3 points to 14.4, and the index of future company outlook edged up from 14.3 to 15. Indexes of future service sector activity, such as future revenue and employment, generally rose in January and remained in solid positive territory.

RETAIL SALES GROWTH PICKS UP


Retail sales picked up pace in January, according to business executives responding to the Texas Retail Outlook Survey. The sales index rose from 6.9 to 14.8, its highest reading in four months. Inventories rose. Labor market indicators reflected less hiring, but slightly longer workweeks. The employment index moved down from 5.8 to 2.7 in January. The hours worked index held steady at 4.8. Respondents were more optimistic about the broader economy than last month. The general business activity index remained at 5.3. The company outlook index rose from 5.4 to 11.5 in January, its highest reading in four months. Twenty-one percent of respondents noted an improved company outlook over the prior month, compared with 10 percent who reported that their outlook had worsened. Retail price pressures eased, while wage pressures continued into January. The selling prices index fell sharply from 19.9 to 9. The wages and benefits index edged up from 14.2 to 15.5, reflecting slightly faster compensation growth, although the great majority of respondents continued to note no change in labor costs. Perceptions of future broader economic conditions were notably less optimistic. The future general business activity index fell 12 points to 13.7, while the index of future company outlook dropped 17 points to 11.6. Indexes of future retail sector activity remained in positive territory in January. The Texas Retail Outlook Survey (TROS) is a component of the TSSOS that uses information only from respondents in the retail and wholesale sectors. The Dallas Fed conducts the Texas Service Sector Outlook Survey monthly to obtain a timely assessment of the states service sector activity. Data were collected Jan.1523, and 246 Texas business executives responded to the survey. Firms are asked whether revenue, employment, prices, general business activity and other indicators increased, decreased or remained unchanged over the previous month. Survey responses are used to calculate an index for each indicator. Each index is calculated by subtracting the percentage of respondents reporting a decrease from the percentage reporting an increase. When the share of firms reporting an increase exceeds the share reporting a decrease, the index will be greater than zero, suggesting the indicator has increased over the prior month. If the share of firms reporting a decrease exceeds the share reporting an increase, the index will be below zero, suggesting the indicator has decreased over the prior month. An index will be zero when the number of firms reporting an increase is equal to the number of firms reporting a decrease. Data have been seasonally adjusted as necessary.

Next release: February 26, 2013


Federal Reserve Bank of Dallas Texas Service Sector Outlook Survey 1

TEXAS SERVICE SECTOR OUTLOOK SURVEY


Business Indicators Relating to Facilities and Products in Texas Current (versus previous month)
Indicator Revenue Employment Part-time employment Hours worked Wages and benefits Input prices Selling prices Capital expenditures Jan Index 8.4 6.4 -0.7 -0.2 12.1 27.1 11.7 13.8 Dec Index 14.9 9.5 4.5 4.5 14.5 30.9 11.1 8.6 Change -6.5 -3.1 -5.2 -4.7 -2.4 -3.8 +0.6 +5.2 Indicator Trend** Direction* (months) Increasing 39 Increasing 35 Decreasing 1 Decreasing Increasing Increasing Increasing Increasing 1 44 45 26 41 % Reporting Increase 30.2 15.5 7.7 9.1 16.6 30.9 20.4 24.1 % Reporting No Change 48.0 75.4 83.9 81.7 78.9 65.3 70.9 65.6 % Reporting Decrease 21.8 9.1 8.4 9.3 4.5 3.8 8.7 10.3

General Business Conditions Current (versus previous month)


Indicator Company outlook General business activity Jan Index 7.5 5.8 Dec Index 9.3 9.7 Change -1.8 -3.9 Indicator Trend** Direction* (months) Improving 16 Improving 15 % Reporting Improved 19.6 20.1 % Reporting No Change 68.3 65.6 % Reporting Worsened 12.1 14.3

Business Indicators Relating to Facilities and Products in Texas Future (six months ahead)
Indicator Revenue Employment Part-time employment Hours worked Wages and benefits Input prices Selling prices Capital expenditures Jan Index 44.2 27.0 9.4 6.4 42.4 48.8 29.8 19.8 Dec Index 38.8 24.3 8.7 6.8 35.9 53.1 32.5 22.8 Change +5.4 +2.7 +0.7 -0.4 +6.5 -4.3 -2.7 -3.0 Indicator Trend** Direction* (months) Increasing 47 Increasing 44 Increasing 7 Increasing Increasing Increasing Increasing Increasing 41 73 73 45 46 % Reporting Increase 55.3 36.1 16.4 13.4 45.0 51.6 37.4 30.2 % Reporting No Change 33.5 54.8 76.6 79.6 52.4 45.5 55.1 59.5 % Reporting Decrease 11.1 9.1 7.0 7.0 2.6 2.8 7.6 10.4

General Business Conditions Future (six months ahead)


Indicator Company outlook General business activity Jan Index 15.0 14.4 Dec Index 14.3 11.6 Change +0.7 +2.8 Indicator Trend** Direction* (months) Improving 17 Improving 16 % Reporting Improved 28.4 28.6 % Reporting No Change 58.2 57.2 % Reporting Worsened 13.4 14.2

*Indicator direction refers to this month's index. If index is positive (negative), indicator is increasing (decreasing) or improving (worsening). If zero, indicator is unchanged. **Number of months moving in current direction. Data have been seasonally adjusted as necessary.

Federal Reserve Bank of Dallas

Texas Service Sector Outlook Survey

TEXAS RETAIL OUTLOOK SURVEY


Business Indicators Relating to Facilities and Products in Texas, Retail Current (versus previous month)
Indicator Retail Activity in Texas Sales Employment Part-time employment Hours worked Wages and benefits Input prices Selling prices Capital expenditures Inventories Companywide Retail Activity Sales Internet sales Catalog sales 20.1 2.0 0.0 16.2 14.6 10.0 +3.9 -12.6 -10.0 Increasing Increasing No Change 20 6 1 35.2 14.0 6.5 49.7 74.0 87.0 15.1 12.0 6.5 14.8 2.7 -3.0 4.8 15.5 24.7 9.0 4.4 21.6 6.9 5.8 0.0 4.4 14.2 33.3 19.9 4.8 17.0 +7.9 -3.1 -3.0 +0.4 +1.3 -8.6 -10.9 -0.4 +4.6 Increasing Increasing Decreasing Increasing Increasing Increasing Increasing Increasing Increasing 6 18 1 2 23 43 6 2 8 35.6 11.6 7.6 12.7 19.9 29.1 22.0 14.5 34.1 43.7 79.5 81.8 79.4 75.7 66.4 65.0 75.4 53.4 20.8 8.9 10.6 7.9 4.4 4.4 13.0 10.1 12.5 Jan Index Dec Index Change Indicator Direction* Trend** (months) % Reporting Increase % Reporting No Change % Reporting Decrease

General Business Conditions, Retail Current (versus previous month)


Indicator Company outlook General business activity Jan Index 11.5 5.3 Dec Index 5.4 5.0 Change +6.1 +0.3 Indicator Trend** Direction* (months) Improving 6 Improving 2 % Reporting Improved 21.0 17.8 % Reporting No Change 69.5 69.7 % Reporting Worsened 9.5 12.5

Business Indicators Relating to Facilities and Products in Texas, Retail Future (six months ahead)
Indicator Retail Activity in Texas Sales Employment Part-time employment Hours worked Wages and benefits Input prices Selling prices Capital expenditures Inventories Companywide Retail Activity Sales Internet sales Catalog sales 42.9 30.0 6.6 50.0 14.9 12.2 -7.1 +15.1 -5.6 Increasing Increasing Increasing 46 46 8 44.5 30.0 11.3 53.9 70.0 84.0 1.6 0.0 4.7 42.6 21.1 12.5 7.9 32.2 44.1 44.2 26.9 14.9 46.2 25.9 8.6 11.7 37.9 51.7 48.4 23.0 12.4 -3.6 -4.8 +3.9 -3.8 -5.7 -7.6 -4.2 +3.9 +2.5 Increasing Increasing Increasing Increasing Increasing Increasing Increasing Increasing Increasing 47 37 2 10 49 45 45 22 38 50.9 29.1 17.3 16.7 34.3 48.5 47.1 38.8 30.5 40.8 62.8 77.9 74.5 63.6 47.1 50.0 49.3 53.9 8.3 8.0 4.8 8.8 2.1 4.4 2.9 11.9 15.6 Jan Index Dec Index Change Indicator Direction* Trend** (months) % Reporting Increase % Reporting No Change % Reporting Decrease

General Business Conditions, Retail Future (six months ahead)


Indicator Company outlook General business activity Jan Index 11.6 13.7 Dec Index 29.0 25.9 Change -17.4 -12.2 Indicator Trend** Direction* (months) Improving 45 Improving 16 % Reporting Improved 23.7 24.6 % Reporting No Change 64.3 64.5 % Reporting Worsened 12.1 10.9

*Indicator direction refers to this month's index. If index is positive (negative), indicator is increasing (decreasing) or improving (worsening). If zero, indicator is unchanged. **Number of months moving in current direction. Data have been seasonally adjusted as necessary.

Federal Reserve Bank of Dallas

Texas Service Sector Outlook Survey

Federal Reserve Bank of Dallas

Texas Service Sector Outlook Survey

These comments are from respondents' completed surveys and have been edited for publication. Our greatest reason for increased cost to provide services is the pending new regulatory environment. The government needs to address the tax and budget issues to reduce the concerns of the business community. The local economy remains sluggish. We are slowly increasing the number of jobs, but high unemployment remains. Construction trade is very slow, but retail, hospitality and health services are doing okay. Insurance market pricing is firming up. However, the level of general business activity is suspect right now. There is uncertainty about cuts to U.S. military budgets. Solid job growth pushes increased retail sales and stronger home sales. Agriculture is slower, but energy is up. Revenues and prices are improving very slightly. There is still some level of uncertainty. I think we will know more in the next 45 days about how consumers really feel about purchasing big ticket items like homes. Overall our outlook is hopeful. Year-end 2012 capital goods sales were a company record as customers used what they thought were the last tax advantages and deductions ever to defer government income taxes. As it turned out, some of those deductions are still available in 2013. We cannot tell what the level of business activity is going to be so far into 2013. January is going to be at best 50 percent of Decembers level. A major customer's expansion is driving our growth for this period. Residential lot construction is increasing monthly in the northern part of the DFW area. It appears this is driving early stages of exploration and development of shopping centers. We can't say it enough times: "Too Much Regulation." You can ask anyone in any industry, and they will all tell you that overregulation is hurting them. All of the compliance cost eventually gets passed on to the customer. It is basically a hidden tax on the consumer. Uncertainty over the cost of health care continues, pending credible and quantifiable information. The Affordable Care Act brings decreases in reimbursement effective Jan 1 for Medicare patients. Strategies to move away from Medicare patient imaging are being pursued at this time. There appears to be a strategy to move imaging from low-cost outpatient facilities to high-cost hospital providers, which will dramatically increase the costs for nonfederal payers and ultimately the consumer who is paying the insurance premium. We are quite concerned about the upcoming effects of the health care reform on our business as the year progresses and particularly in 2014. We are concerned that business may be impacted by the 2 percent increase in payroll taxes this year. Our customers are very budget wary, and we think the 20 to 40 dollars less per check could result in fewer restaurant visits in early 2013. Its too soon to tell. The majority of our growth is coming from new restaurant openings. Our sales are down about 2 percent in the first two weeks of this fiscal period. That is the worst performance since early in 2012. Our employee numbers and workweek have stayed the same because operations did not respond to the drop in sales, which led to a high increase in wage and benefit cost. Our cost of goods is stable. In the six-month horizon we have indicated that the number of employees and the average workweek will be down. It won't shift a whole lot, but if sales stay where they are and it seems like that is what is going to happen, we will have to cut back. The average workweek hours will take the largest hit. We expect that we may be forced to cut some positions that are currently full-time to part-time. We are still tied directly to irrigation and rain water received. The increases in wages in January are normal annual cost of living and merit increases. The increases anticipated six months from now are seasonal increases.
Federal Reserve Bank of Dallas Texas Service Sector Outlook Survey 5

High grain prices are still adversely affecting our ability to sell fish at a profit. We are very concerned about the unknowns of the health care reform. We spent a lot of time attending seminars and reading about it instead of working to increase business. We think we are okay but are not totally sure and afraid of the hidden items. We are also worried about the uncontrollable costs, such as the health insurance premium itself. Providers are indicating substantial increases are inevitable. As we have said in the past, banks are starting to lighten up, but they need to learn not to open full blast then just completely turn off. We never have experienced times like these where you don't have a feel for where your business activity is. We started 2013 with a larger open order file than last year, but January may be one of our worst months in years. We think we have some pent-up demand and 2013 will be better than 2012, but were still not sure about inflation, maintaining margins and overhead cost with all that is being talked about. There is not much room for mistakes coming off some tough years, but we still believe better days are ahead. Questions regarding the Texas Service Sector Outlook Survey can be addressed to Jesus Caas at jesus.canas@dal.frb.org. The Texas Service Sector Outlook Survey can be found online at www.dallasfed.org/microsites/research/surveys/tssos/.

Federal Reserve Bank of Dallas

Texas Service Sector Outlook Survey