Despite Bernstein and Biden demanding the great unwashed realize just how great they have it in America, this morning’s Dallas Fed Services Sector survey offers some insights from actual real people in the actual real world trying to do actual real business… and it’s not pretty.

For two straight years (24 straight months), the Texas Services sector has been in contraction (below zero) with May’s -12.1 print worse than expected. For context, the Great Recession of 2008/2009 also saw 24 straight months of negative prints…

Source: Bloomberg

Respondents in May continued to perceive worsening broader business conditions, with the company outlook index dropping from -1.8 to -5.7, and wage pressures increased slightly.

Additionally, retail sales activity declined in May, according to business executives responding to the Texas Retail Outlook Survey. The sales index, a key measure of state retail activity, fell from -10.4 to -16.4, indicating retail sales fell at a faster rate than during the previous month. Retailers’ inventories increased over the month, with the May index at 2.4.

Retail labor market indicators suggested a contraction in employment and workweeks in May. The employment index fell from -0.5 to -5.2, while the part-time employment index fell 10 points to -7.0. The hours worked index continued in negative territory at -4.2.

Retailers continued to perceive a worsening of broader business conditions in May. The general business activity index remained in negative territory and fell 11 points to -28.8, the lowest index level since December 2022. The company outlook index also fell from -6.4 to -15.7. The outlook uncertainty index increased six points to 15.1.

Source: Bloomberg

So the ‘numbers’ are not pretty… but wait until you see what the respondents had to say…

Trucking is definitely in recession. Truck freight in both volume and price per mile is way down. Our business won’t recover until the industry recovers.

High interest rates and high inflation are ubiquitous among ‘real’ people’s concerns:

We are seeing a little slowdown, and inflation doesn’t seem to moderate as much as we expected, so we are still seeing increases in input costs and services.

We see the impact of the high-interest-rate environment starting to impact our customers and customer prospects. Growth is declining, and new business inquiries have waned for key products and services.

Interest rates and inflation continue to dominate company decisions—our company and our clients and prospects. Costs are high, and budgets are super tight. Therefore, confident decision-making is more challenging for all. Our hiring is on hold while most of our clients continue with layoffs.

Interest rates remain a concern for my clients.

This is the worst we’ve seen in the real estate market since the Great Recession.

Most investors are sitting on the sidelines until after the election or interest rates decrease.

We have been in a rolling 15-month recession that is starting to brighten up slightly. Our real estate orders have continued to decrease this year, and that is an indicator that the market is pulling back due to the unknown of where interest rates are headed. There is still a lot of money on the sidelines waiting to be deployed, but until the market can determine where the economy is headed, it will stay there.

Election-year unknowns are creating instability and disruption in our primary markets.

Interest rates and higher input costs seem to be the key drivers currently.

The business environment feels quite unstable currently. Service prices for support vendors and supplies continue to increase…

Higher prices are frustrating our guests. Customer counts are down for that reason…

Our cost of goods is stable; however, wages continue to have upward pressures because employees are struggling to keep up with rising rents, rising groceries and rising interest rates.

We continue to be concerned about interest rates.

A commercial real estate developer unloaded on the regional Fed:

…our ability to raise capital for new projects has been greatly impacted by the current interest rate environment, and the value of existing assets has been significantly impaired.

Currently, all levers are in the wrong direction for our underwriting of existing and operating assets and future developments.

Rents are softening.

Overall capital and financing costs have substantially increased.

Materials and labor costs have stabilized but remained high.

Operating expenses are up (including insurance, property taxes, property management, etc.), and cap rates have increased (due to interest rate increases).

Equity returns have not decreased, unfortunately.

Therefore, we are currently very far off from economically being able to make developments work.

We have tried very hard to hold on to employees throughout the last two years of challenging times, but we are on the brink of having to make major staffing cuts if we are unable to find some relief from some or all of the above metrics.

We have several (eight in total) development pipeline assets, which include fully entitled, fully designed (shovel-ready) multifamily and mixed-use projects that are permitted and ready to go. However, the carry cost is substantial, and the reality is that we will likely have to sell some to all of our pipeline assets at a discount, reduce staff and wait to start over once the economic environment improves and can support new development.

Our outlook is that the current economic environment will cause many developers to shut down, and only those who can manage to scale back their businesses will survive to this point.

Even though (in Texas) there is a still a large supply-demand deficit for housing, there were many new starts in 2021–22 that are now completing and beginning to lease. Due to the unusual amount of supply coming online all at the same time, lease-up is slower than normal, and even though all the units will get absorbed (i.e., because the demand is still strong), it will be at a slower rate until all of the competing units are leased up.

Once that happens, we believe there will be a two-to-three-year period of little to no new project starts, followed by a lack of supply in 2026–28 that will cause rents to spike and likely support the economics of new developments to resume. We hope that during the next two-to-three-year period, when the economics do not work for development, that materials and labor pricing will also fall, further helping the economics for development.

Finally, three respondents summed-up how bad things are:

It’s an election year, so we would assume no one is going to allow the economy to go down. However, signs are mounting…

and worse…

Inflation is getting pretty scary. We can’t make enough interest on our deposits to cover inflation. We are worried about how to keep increasing pay to our employees to offset inflation.

and worse still…

We are fairly certain that we will be closing our doors and releasing as many as 60 employees in the next few months.

Maybe the president should pop down to Dallas and put these guys straight on just how great they have it…