Economic Research Publications
Dallas Beige Book
July 28, 2010
The Eleventh District economy expanded at a moderate pace over the past six weeks, although business outlooks were slightly more cautious. Respondents in most sectors said activity improved or held steady since the last report. The notable exception came from homebuilders and construction-related manufactures who said demand dropped off following the expiration of the first-time homebuyer tax credit. The majority of Eleventh District respondents expect economic conditions to remain positive, but many expressed uncertainty about the pace of future growth. Numerous contacts said uncertainty regarding fiscal and financial reforms was restraining business activity.
Selling prices held steady for most responding firms. There were scattered reports that rising input costs were squeezing margins. Notably, paper producers said linerboard prices continued to rise, and high-tech firms said supply-chain problems had increased costs for producers. Some transportation service firms had raised fees but reduced fuel surcharges. Lumber producers said prices had come down since the spring run-up, and staffing firms continued to note pressure to reduce fees. Contacts in residential construction said industry consolidation has led to fewer concessions in pricing.Crude oil prices traded in a range of about $70 to $75 per barrel from late May through early July, down from the previous report. On-highway prices of both gasoline and diesel fell about 5 percent during the reporting period. Natural gas prices mostly ranged between $4.50 and $5.00 per Mcf--moving up briefly over $5.00 per Mcf in June. The increase in petrochemical prices seen earlier in the year due to capacity outages has reversed course.
The majority of respondents noted steady employment levels, although there were scattered reports of hiring activity. Staffing firms said demand continued to increase for their services, and some contacts in residential construction, construction-related manufacturing, aircraft manufacturing and auto sales had added workers. On a less positive note, contacts in the energy industry said the moratorium on deepwater drilling resulted in significant regional layoffs, although energy service companies were shifting Gulf Coast workers to land or shallow water projects when possible. Wage pressures were mostly nonexistent, with the exception of the airline industry. Although the overall labor market remains slack one transportation service provider was offering signing bonuses to truck operators, and a few firms noted difficulty finding skilled workers.
Most construction-related manufacturers reported a slowdown in activity, and outlooks were less optimistic than in the previous report. Producers that sell to the homebuilding industry said orders dropped off more than expected following the expiration of the first-time homebuyer tax credit. Contacts also reported declines in private nonresidential construction. Fabricated metals producers said sales growth flattened since the last report, while primary metals firms said activity picked up slightly, but was bouncing along the bottom.
Production and new orders for high-tech manufacturing continue to grow at a strong pace. Capital expenditures that were postponed during the recession are driving purchasing, according to respondents. Inventories were in good shape, having built up from extremely low levels early in the year. Respondents expect demand to continue to grow at a strong pace for the next three to six months, but there is increased uncertainty about the outlook for 2011.
Manufacturers of aircraft and parts said sales had improved, with orders coming mostly from the commercial and general aviation industries. Budget cutbacks have curbed governmental and military sales. An aircraft repair contact said growth in demand had softened slightly, and the backlog of orders had dropped. Orders for emergency vehicles remained flat and backlogs edged down, but not as much as contacts had expected given budget strains among municipalities.
Reports on demand for paper products were mixed, but most contacts said sales are about even with or slightly higher than a year ago. Food producers noted increased demand, and outlooks were positive.
Producers of petrochemicals used in housing and commercial construction (PVC) said orders fell since the last report, and expectations are for no near-term improvement. Other than PVC, there were no signs of weakness in chemicals. Demand was strong for petrochemicals used in manufacturing, pulp and paper and alumina. In addition, contacts said domestic demand for ethylene/polyethylene products remained solid, and that export demand has returned slowly as capacity was restored and prices declined. Refiners said gasoline demand was steady in recent weeks while diesel demand has improved. Refinery utilization rates improved to near 90 percent, as refiner margins remain relatively strong.
Reports from retail contacts point to solid growth. Department store sales were slightly stronger than anticipated, but the pace is expected to moderate in the second half. Consumers continue to deleverage and correspondingly remain price sensitive. Sales growth in the Eleventh District tracked slightly below the nation. Expectations are for continued gradual improvement through year-end.
Automobile sales were unchanged over the reporting period, and contacts said inventories were lean. The outlook is cautiously optimistic, with sales expected to rise slowly.
Most staffing firms report strong demand across a wide range of industries. The majority of placement activity continues to be conversions of temporary workers to hires. Direct placement remains reduced as businesses are hesitant to add to permanent payrolls. While near-term outlooks remain optimistic, respondents are still cautious about the longer term. Demand for accounting services was sluggish, but above year-ago levels. Tax-related services slowed seasonally, but transactional and consulting activity picked up slightly. Demand for legal services held steady at low levels, but most contacts were slightly more optimistic in their outlooks. Accounting and legal contacts said uncertainty about fiscal and financial reform was holding back business activity.
Demand for transportation services strengthened. Several contacts said cargo volumes were up considerably, with the increases being broad-based across industry sectors. Railroad respondents noted cargo volumes rose strongly across the board, with a particularly large increase in metals that was likely due to an improved auto industry and stronger demand for home appliances. Shipping firms said retail trade was boosting volumes for small package shipping. Airline traffic was down slightly since the last report, but up strongly compared to a year ago. Outlooks for the transportation services industry were generally positive but cautious.
Construction and Real Estate
Builders of low-to-moderate priced homes reported a significant drop off in housing sales in May and June following the expiration of the first time-homebuyer tax credit. The pace of decline slowed in early July, and some contacts are hopeful the tax-credit "hangover" may be over. New home starts overall are expected to come down in the second half of the year, and outlooks for the homebuilding industry remain guarded. Existing home sales softened slightly in recent weeks, according to contacts, but activity for the year is up from the same period in 2009. Apartment demand continues to improve.
Commercial real estate markets remain weak. While a few lease deals have taken place, demand for space overall remains subdued and rents are edging down. As such, nonresidential construction activity continues to decline, and there were a few reports of developers going out of business. On a positive note, contacts said improvement in debt markets had spurred some property sales, and prices were up from the trough. One contact noted an increase in lender sales as banks work through nonperforming loans.
Loan demand remained soft with weakness across all categories. Nonperforming loans have stabilized and are not expected to worsen, although contacts said it will be a while before they come down noticeably. Deposits were mostly steady, but responding institutions said fewer loans pushed down the loan-to-deposit ratio. An over-riding theme among financial industry respondents is uncertainty over fiscal and financial reform legislation that has created a wait-and-see mentality. The uncertainty is delaying transactions, depressing loan activity and causing some institutions to look for alternative ways to grow loan portfolios and earnings.
The U.S. and District rig counts increased during the reporting period, despite a drop of 39 rigs in the Gulf of Mexico. As the share of oil-directed drilling continues to rise, natural-gas directed drilling was surprisingly steady despite high inventories and low prices. Some contacts noted that shale activity is stronger than prices justify due to urgency to secure leases in new basins and an influx of foreign capital attracted by new shale technology.
Tropical storms brought widespread rains to Texas, particularly benefitting parts of the state that had been getting dry. Favorable crop conditions and robust forage production on pastures have increased optimism among agricultural producers. Cattle prices have declined, though ranchers still anticipate strong prices compared to last year. The recent rainfall will boost yields for Texas cotton, potentially pushing down prices.