U.S. Federal Reserve Beige Book: Dallas District (Text)

The following is the text of the Federal Reserve Board’s eleventh District--Dallas.

ELEVENTH DISTRICT--DALLAS

The Eleventh District economy expanded at a stronger pace over the past six weeks than in the previous reporting period. Manufacturing activity increased overall, and many contacts were more optimistic in their outlooks. Retail sales activity improved during the reporting period, and auto sales held steady. In the nonfinancial services sector, demand for accounting services was strong, legal firms reported modest growth, and most transportation services firms noted improvement. Staffing services contacts said demand was steady. The housing sector continued to improve, with further gains in sales and construction. Office and warehouse leasing activity remained steady. Financial institutions noted modest growth in loan demand, and energy activity improved during the reporting period. Drought conditions worsened across the Eleventh District. Prices remained stable at most firms, and employment levels were steady.

Prices

Most responding firms said prices were steady and they expect increases to remain modest for the remainder of the year. One exception is home prices, which have risen strongly due to pent-up demand and low inventories. While some contacts said prices for construction materials were up, others said increased competition had lowered prices. There were some reports that builders expect less price pass-through going forward. Transportation service industry contacts noted increased shipping rates earlier in the year, but expect price gains to ease with recent declines in the price of jet fuel. Automobile dealers said prices held steady. Cattle prices trended lower over the past six weeks while retail beef prices rose to a record-high due to strong demand.

Oil prices fell slightly over the reporting period. A late winter brought natural gas inventories back into the seasonally normal range and pushed prices above $4. Gasoline and diesel prices declined since the last report. Labor Market Employment held steady at most responding firms. There were scattered reports of hiring from some transportation manufacturing and transportation services firms. Financial firms added employees to comply with regulatory stress testing and wealth management, and noted employment growth in Austin and the Eagle Ford Shale area. Several contacts reported difficulty finding qualified people to fill vacancies, particularly in staffing services, accounting, machinery manufacturing, IT and IT-related retail. A construction-related manufacturer noted truck drivers were in short supply. Wage pressures remained largely subdued, although increased compensation was reported in legal and financial services.

Manufacturing

Reports on construction-related manufacturing were mixed, although firm outlooks remain mostly optimistic. Some lumber producers noted increased activity, while others said sales were less than expected. A cement producer noted strong growth in residential demand--especially in Houston--and a recent boost from commercial infrastructure construction in Dallas. Fabricated metals producers said demand remained steady for both private and public projects. Primary metals producers said demand had slowed slightly since the last reporting period, and outlooks were cautious.

Contacts in the high-tech manufacturing industry reported that orders and shipments were flat to slightly improved since the last survey. Respondents who reported a slight improvement in orders said that growth was broadly based across sectors. Inventories were reported to be lean in general and at or near desired levels. Respondents expect demand to improve slightly in the second half of this year.

Paper manufacturers said demand increased to normal levels after the decrease reported in the last report. Contacts are slightly more optimistic. Food producers said demand was about 15 percent higher than last year at this time. One contact noted the successful introduction of new products to schools and said sales in that market were up 30 percent. Inventories were at the right levels for contacts, customers and suppliers.

Transportation manufacturing contacts said orders were steady to up. Outlooks were generally positive, although aviation contacts were more uncertain than in the last report.

Petrochemical producers reported a slowdown in activity since the last report, mostly due to weakness in Europe. Still, contacts remain very optimistic in their outlooks. Refiners said operating rates and margins were up over the reporting period.

Retail Sales

Retail sales volumes increased over the reporting period and are up from a year ago. According to one national retailer, Texas continued to outperform the nation. Outlooks for the upcoming quarter and the rest of the year are positive. Automobile sales were steady over the reporting period, and demand remains above year-ago levels. Contacts are positive in their outlooks for the remainder of the year, although increasing costs were a concern.

Nonfinancial Services

Staffing services contacts said demand was flat over the past six weeks. Placements were strong in mortgage-related finance and residential construction jobs. One firm noted an increase in the number of jobs but a decline in workweeks as businesses redistribute hours to minimize the impact of health care reform. Since the last Beige Book, accounting demand was strong and firms noted a moderate increase in non-tax-related work over the reporting period, with advisory work leading the way. Legal firms reported modest demand growth, particularly for intellectual property litigation, real estate, wealth planning and health care work. Outlooks were mildly optimistic, with strength expected in real estate and corporate work.

Transportation service firms said overall cargo and container volumes increased over the reporting period. Railroad contacts reported notable increases in motor vehicles, petroleum, lumber and wood and crushed stone volumes, while volumes for grain and metallic ores declined. Small parcel shipments picked up, with demand growth led by retail trade. Air cargo volumes were flat both domestically and internationally.

Reports from airline contacts were mixed. Some said demand increased during the reporting period while others noted flat travel demand due to bad weather and reduced demand from the government sector. Outlooks were fairly strong for the near term, but contacts are less optimistic about demand in the longer-term due to sluggish economic growth and fiscal uncertainties.

Construction and Real Estate

The Texas housing sector continued to improve over the past six weeks. Contacts said home sales remained strong with inventories still low, despite some reports that more homes were being listed. New home construction activity picked up pace since the last report, although some contacts mentioned higher prices may slow sales growth later in the year. Apartment construction remained at high levels and investment activity for multifamily projects continued to be strong, according to respondents.

Contacts in the commercial real estate sector said leasing activity for office and industrial warehouse space continued at a steady pace. Contacts noted a pickup in building activity in the office sector.

Financial Services

Financial institutions experienced modest growth in loan demand, with robust growth in residential mortgages and auto lending and weakness continuing in corporate transactions. Non-performing loans continue to improve and debtors are rapidly paying down mortgages and auto loans. Loan pricing remains very competitive. Deposits increased modestly and deposit rates remained mostly unchanged. Employment and compensation growth were flat for the most part. Mortgage lending is expected to remain robust.

Energy

Energy activity improved since the last report. The Texas rig count increased, and contacts noted strong global demand. Respondents expect further improvement in the second half of the year, especially due to anticipated increases in rig activity and production from the Gulf of Mexico.

Agriculture

Drought conditions continued to worsen slightly across most of the District over the reporting period, despite scattered rainfall. The Texas wheat crop suffered from dry weather and late freezes and production is expected to be significantly below average. Conditions for other crops are generally worse than at this same time last year but not quite as bad as in 2011.

SOURCE: Federal Reserve Board

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