U.S. Federal Reserve Beige Book: Dallas District (Text)
The following is the text of the Federal Reserve Board’s eleventh District--Dallas.
The Eleventh District economy expanded at a moderate pace over the past six weeks. Energy activity remained strong, and construction and real estate activity picked up as housing demand strengthened. Demand for business services improved slightly, and transportation services activity continued to expand. Reports on manufacturing activity were mixed. Growth in retail and auto sales slowed over the reporting period, but Eleventh District sales continued to outperform the national average, according to respondents. Lenders noted steady loan demand. Agricultural conditions improved slightly. Price and wage pressures were modest over the reporting period, and employment levels continued to edge up. Many respondents across industries said continued uncertainty about upcoming elections was clouding outlooks.
Most reporting firms said prices were steady. Several contacts in the transportation services industry noted higher diesel prices led to higher costs. Shipping firms expect higher ground and air prices as a result. Airline industry contacts noted that business travelers were very price sensitive and soft demand was keeping a lid on fares. Food and cattle producers noted price increases due to continued commodity price pressures.
The price of WTI rose during the reporting period, reaching nearly $99 per barrel. Natural gas prices remained depressed. Retail and on-highway prices of both gasoline and diesel ended the reporting period slightly higher. Contacts noted that Hurricane Isaac had little impact on energy pricing. The prices of petrochemical products were flat to slightly up over the past six weeks.
Employment held steady or increased at most firms. Shortages of truck drivers continued to be reported in several industries. Accounting and legal firms noted increased hiring and said compensation has risen this year. Staffing firms reported additional hiring in response to high levels of demand, but there were no reports of pressures on wages or salaries. Skill shortages remained an issue for energy services firms, although some large firms noted slight easing. Retailers said hiring increased since the last report and expected holiday hiring to be stronger than last year.
Overall demand for construction-related products was mixed over the last six weeks. Producers of stone, clay, glass and lumber reported steady to slightly increased demand, with particular strength in residential activity. Fabricated metals contacts said growth in demand had slowed. Reports from primary metals contacts were mixed, although a large electrical wire manufacturer said demand in August was stronger than in any other month this year. Across the board, contacts noted uncertainty in their outlooks due to the upcoming election.
High-tech manufacturers said sales growth slowed modestly over the reporting period. Most contacts attributed the slowdown to weakened international demand and lower forecasts for world economic growth. Weaker demand was noted across a broad range of products, including industrial, computers and communications infrastructure. Contacts expect demand to remain weak through year-end.
Demand for paper products increased in line with normal seasonal patterns. Food producers noted increased business over the last thirty days due to a slight pickup in consumer demand. Reports from most transportation equipment manufacturers were mixed; aviation manufacturing orders were down slightly while other firms noted flat to increased activity.
Petrochemicals producers said demand remained mostly flat since the last report. Ethylene production fell to a three-year low as plants went offline for maintenance and improvement. Ethylene and polyethylene margins remained relatively stable and largely healthy, although exports softened. Gulf Coast refiners said operating rates remained over 90 percent, and strong export demand was preventing a buildup in domestic inventories. Refinery margins rose to the highest level since 2008 in August and have since remained very healthy.
Retail sales growth softened over the reporting period, and sales are up slightly year-over-year. Sales in the Eleventh District continue to outperform the nation, according to two national retailers. Contacts noted that holiday hiring has begun or will begin soon, and hours worked are up from the previous report. Commodity input costs are easing, but the drought has caused prices for grains and feedstock to rise. The outlook for the rest of the retail quarter, which ends in October, is mixed but contacts are cautiously optimistic for the fourth quarter.
Automobile sales were flat over the past six weeks but are up year-over-year. Contacts expect a modest increase in selling prices with the 2013 models due out soon. Outlooks are generally uncertain because of the election and consumer confidence, but fourth quarter is expected to be better year-over-year.
Staffing firms said demand growth slowed slightly but is expected to turn around in coming weeks. Demand from the steel industry was very strong, with contracts extending through 2014. Engineering and mortgage processor jobs were in high demand, while the need for oil workers has “become less crazy.” There were fewer requests for workers in the plastics industry. Outlooks remained fairly optimistic.
Accounting firms noted a slight increase in activity. Demand for insurance and audit services experienced positive growth, while that for advisory and tax services was flat to slightly down. Demand for energy-related services remained strong. Legal contacts said overall demand for services was not much changed since the last report. However, activity related to energy, labor-services and real estate had increased. Outlooks were cautiously optimistic.
Reports from transportation service firms were mostly positive. Railroad contacts said volumes picked up since the last report. Motor vehicle shipments continue to be strong, and contacts noted healthy volumes of some construction-related products, including lumber and wood and crushed stone. Container volumes continued to increase and shipping firms said small parcel volume growth had recently accelerated, led by improvements in wholesale and retail trade. Air cargo volumes continued to decline due to weakness in the international sector.
Airlines noted softer passenger demand since the last report, citing weakness in Europe and Asia. Respondents were cautious in their outlooks, and slightly more pessimistic than six weeks ago.
Construction and Real Estate
Single-family housing activity continued to increase at a good pace over the past six weeks. Contacts said new and existing home sales outpaced expectations, and new home construction activity increased. Inventories of both new and existing homes remained tight, leading to price gains. Apartment construction picked up since the last report, and outlooks for the multifamily sector remain quite optimistic. Leasing activity in the office and industrial real estate sectors remained steady at a good pace. While commercial construction remains at low levels, contacts expect activity to improve.
Overall, financial firms reported flat loan demand. Auto loan demand, particularly for new autos, was a bright spot, and energy-related lending remained strong. Business lending and commercial real estate lending were weak. Loan pricing remained very competitive and has squeezed profit margins. Loan quality continued to improve as delinquency rates trended down and new loans are granted to more creditworthy customers. Deposits kept growing even as rates remained very low. Outlooks were mixed, and contacts said fiscal worries were negatively impacting loan demand.
Respondents at energy-related firms said business remained strong with long lead times, although the District active rig count declined modestly over the reporting period. Producers concentrated their production on oil, as the prices of both natural gas and natural gas liquids remain very low. Outlooks were essentially flat. Activity was robust but there is little hope for further improvement through the end of the year.
The District remained largely in drought, although scattered rainfall improved soil moisture conditions in several areas. Crops were mostly in fair to good shape. Production is expected to be better than last year--when the drought was much more severe in the Eleventh District--but below average because of ongoing dry conditions. Grain prices remained high due to the Midwest drought, adversely affecting Texas’ large livestock sector as feed costs reached record highs.
SOURCE: Federal Reserve Board