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 grew at a modest pace since the last report. Manufacturing activity held steady or declined, while demand for business services was flat. Activity in the transportation services sector was mixed. Retailers said sales growth moderated. The single-family housing sector saw continued improvement, and activity in the multifamily sector was strong. Office, retail and industrial leasing activity increased, but commercial real estate investment activity remained sluggish. Financial services respondents said overall loan demand was soft during the reporting period. The energy industry continued to expand at a robust pace, while agricultural conditions remained weak. Employment levels were stable at most responding firms and price pressures were mostly subdued.
Price pressures were minimal across industries. Most contacts said prices were stable or down, although prices for new cars rose slightly and staffing and legal services firms noted modest increases in billing rates. The majority of respondents reported that raw materials prices were unchanged or down. The exceptions were producers of paper and of food who noted increased prices for some inputs. Contacts in the agricultural sector said cattle prices rose since the last report.
The price of WTI was near $76 per barrel in early October, and has risen to nearly $100 per barrel. Demand for gasoline has been soft. Diesel demand, in contrast, has strengthened on a year-over-year basis and prices have climbed much faster than gasoline. Prices of petrochemicals and plastics declined due to weak domestic demand and a stronger dollar. Natural gas prices remained low, near $3.50 per thousand cubic feet throughout the survey period.
Most firms reported steady employment levels, although there were reports of slight hiring activity. Staffing firms continued to note high levels of demand. Some oil services firms, primary metals and transportation manufacturers reported moderate employment increases, and said they continue to look for additional workers. Retailers said holiday hiring was ramping up, and one firm noted that they planned on hiring more seasonal workers than last year. Contacts in the auto sales and airline industries noted slight payroll increases. Wage pressures remained minimal, although upward pressure for certain skilled positions was noted by airlines and a few construction-related manufacturers.
Most construction-related manufacturers reported stable demand, although there were reports of stronger sales related to commercial, government and apartment construction projects. Construction-related outlooks were mostly unchanged, but a few contacts said they expect conditions to improve next year.
Respondents in high-tech manufacturing report that sales have been flat since the last report, with the exception of demand for mobile devices, cloud computing and data storage which continues to increase. Several contacts expect strength in demand for mobile and productivity enhancing devices to accelerate, and thus improve overall activity in the high-tech manufacturing sector by mid 2012, even if global output remains sluggish or weakens. Most respondents said employment levels have held steady and inventories are at desired levels.
Overall conditions in the paper products sector were mixed, but all contacts described outlooks as weak. Automobile and aviation equipment manufacturers said sales had softened since the last report but remained significantly up from year-ago levels. Outlooks are optimistic, with contacts expecting sales to remain strong through next year. Food producers reported a seasonal increase in demand, and outlooks were positive, although they are not hiring due to concerns about current economic conditions.
Contacts described demand as seasonally weak for petrochemicals and plastics. Sales in domestic markets continued to be sluggish. The recent rise in oil prices together with lower petrochemical prices is making Texas’ natural gas based products more competitive, spurring exports. Refiner margins were strong and over $25 per barrel in October, but have narrowed in recent weeks with the rise in crude prices. Refinery utilization rates were low, as production declined for the fall maintenance period.
Retail sales growth moderated since the last report but showed continued gains over the comparable period a year ago. Cooler weather spurred winter clothing sales, and one retailer reported strong online sales. Contacts indicated that they are comfortable with level of inventories. Eleventh District retail sales growth trended roughly in-line with the nation over the reporting period, according to two large retailers. Overall, expectations are for modest growth this holiday season.
Demand for automobiles held steady. Vehicle inventories have mostly normalized from the tsunami-related shortage experienced earlier in the year, but some foreign manufactures have been recently affected by the flooding in Thailand. The used car market continued to be tight. Contacts expect sales to slow seasonally through year end, and then to rise moderately in 2012.
Demand for staffing services held steady at high levels. One contact reported engineering, IT and healthcare as strong sectors, and another mentioned solid demand for steel workers. Outlooks remain cautious but were more optimistic than the previous reporting period, with contacts expecting demand to remain flat or improve by mid-2012. Demand for accounting services was flat, and outlooks were unchanged. Legal firms reported steady demand, with a slight pickup in litigation activity and continued strength in intellectual property, energy and some real-estate related services.
Reports from transportation service firms were mixed. Railroad firms reported a broad-based increase in shipments during the reporting period, but said that the numbers were somewhat artificially inflated due to capacity coming back online after the flooding in the northern U.S. Overall container volumes declined during the reporting period, and outlooks were slightly less optimistic than the last report. Small parcel shipments rose in October partly due to growth in retail trade activity. Airlines reported solid and steady demand over the past six weeks. A major airline noted that business travelers were more price sensitive than earlier in the year. Domestic demand and travel to Latin America remained strong, but travel to Europe and Asia was weak. Airline contacts expect to see stable demand through year end.
Construction and Real Estate
Contacts in the housing sector continued to note improvement. Inventories of existing homes fell further since the last report, and new home inventories remained lean. Single-family home sales are better according to contacts, but economic uncertainty is keeping many would-be buyers on the sidelines.
Apartment demand rose even more since the last report, and contacts are very positive in their outlooks. Some respondents noted increased sales of apartment complexes to investors.
Contacts that lease to industrial, retail and business firms noted an increase in demand. However, sales of commercial properties were sluggish given the current financial environment.
Financial firms reported steady but soft demand for loans. National banks noted strong demand from large corporations but flat or declining middle-market lending activity. Regional banks said loan demand was flat, and loan pricing remained somewhat aggressive. The quality of loans outstanding continued to improve, with contacts noting a decline in problem loans. Outlooks are cautious, although contacts were less pessimistic than they have been over the past few months.
Drilling activity remains strong, with 20 new land rigs added in Texas since the last report. Shale-directed activity continues at high levels. Revenues are growing and backlogs remain solid. Activity in the Gulf of Mexico also rose by six rigs, with new permits issued for deep water drilling.
The District remained in drought, although severity lessened slightly in parts of Texas and New Mexico that received some rain in recent weeks. Planting of winter wheat continued at a fairly normal pace but the crop was in poorer condition than last year due to very low soil moisture. Livestock sell-offs continued at a slower pace, as many producers have already liquidated much of their herds. Grain prices fell slightly over the reporting period, largely due to lower export demand. By contrast, cattle prices were higher than six weeks ago and beef exports remained very strong.