Economic Research Publications
Dallas Beige Book
October 20, 2010
The Eleventh District economy expanded at a more subdued pace over the past six weeks than during the previous reporting period. The energy, transportation services and staffing industries which have been a source of strength in the recovery, saw positive but slower growth. Business activity was unchanged in most other industries, although retailers said sales improved and financial firms said lending activity picked up slightly. Demand continued to be strong for petrochemical products, and agricultural conditions remained favorable. Firms' outlooks are positive, but contacts say uncertainty about economic growth, regulatory reform and public policy has introduced more caution.
Selling prices held steady at most responding firms, but there were some reports of increases. Small parcel shipping prices rose slightly while large parcel shipping prices increased sharply, according to contacts. Prices for some petrochemicals rose during the reporting period, and agricultural respondents said commodity prices increased across the board. Food producers were considering price increases because of rising costs for dairy and sugar, and retailers noted higher costs for cotton, corn, wheat, milk and cheese.
After holding steady in a tight range between $74 and $76 dollars per barrel for most of the reporting period, the price of crude oil rose to over $80 in early October on stronger demand from China and a weaker dollar. Retail gasoline and diesel prices held steady since the last report, and natural gas prices remain under $4 per Mcf.
Most responding firms reported steady employment levels, and some noted slight hiring activity. Contacts in the airline, primary metals, transportation manufacturing and auto sales industries said they had added workers. Staffing firms reported slower growth in demand for their services, although contacts said direct hire fees for IT and professional workers had risen. Minor layoffs were reported by some construction-related manufacturers and one legal firm. Wage pressures were minimal, although higher wages were reported by airlines and some shipping and transportation manufacturing firms.
Most construction-related producers, including cement, lumber and fabricated metals firms, said orders remained flat over the past six weeks. Contacts believe soft demand is related to uncertainty about the economic and political environment. One glass contact said sales rose due to a pickup in apartment construction. Primary metals producers noted a slight uptick in business. Some contacts are selling to new markets, such as solar panel production. Others indicated that remodeling activity had boosted sales. Despite the increase, contacts believe the industry has a long road ahead.
Manufacturers of high-tech products said that sales and orders were growing at the same or slightly slower pace since the last report. Most respondents said inventories are below or at desired levels. Sales are expected to continue to grow at a moderate pace over the next six months, but there was increased uncertainty in respondents' outlooks.
Paper manufactures said orders were slightly down, in part because customers were managing inventories more tightly. Contacts expect sales growth to be anemic through year-end. Food producers said demand growth held steady. Sales growth of premium items had picked up, but orders for value items weakened. Most transportation manufacturers noted steady demand.
Petrochemical producers noted strong domestic demand for most products. Export growth continued to slow, reflecting higher prices, although there were reports of renewed Chinese interest in some products. Domestic orders for PVC used in commercial construction were weak, but exports were stronger, according to contacts. Refiners said conditions continued to weaken. Both margins and operating rates fell since the last report, and gasoline and distillate inventories have risen against seasonal expectations.
Back-to-school spending led to a pickup in sales over the reporting period, however customers remain extremely price conscious. Consumers continue to focus on non-discretionary goods, but contacts noted there was an uptick in spending on medium-priced household goods. Eleventh District sales trended roughly in line with the nation during the reporting period. Contacts expressed caution in their outlooks and said competition remains fierce.
Automobile sales were steady after accounting for seasonality. Inventories are a little tight, notably for large SUVs. Used car prices have risen, reflecting elevated demand and short supply. Expectations are for continued slow growth in sales.
Staffing firms reported stagnant demand over the reporting period. Business is still at good levels, but contacts say firms are eliminating some previous positions or finding other ways to fill vacant jobs. Despite the slowdown, contacts report that demand is coming from a wide-range of industries, including light industrial, manufacturing, IT, and call centers. Clerical workers remain in high demand. Near-term outlooks remain optimistic, but contacts are more uncertain about the longer term.
Accounting firms said business had improved modestly, as more merger and acquisition work has materialized since the last report. Contacts also noted a pickup in financial consulting and tax-related work going into the fall season. Demand for legal services remains soft. The only area of activity is mergers and acquisitions. Legal and accounting firms say they are in a better position than last year, but they remain cautious in their outlooks.
Transportation services demand was positive, but the pace was somewhat slower over the past six weeks. Contacts said intermodal cargo volumes increased minimally, but that the increases were broad based across industries. Railroad contacts noted moderate gains in volumes overall, although shipments of grain, non-metallic minerals, chemicals and petroleum products increased at a strong pace. International container trade volumes flattened over the past month, but are up from a year ago. Firms that ship small parcel goods said volumes dipped in September after several months of positive growth. Airline traffic was steady to slightly down seasonally over the past six weeks. Contacts noted that conditions are much better than a year ago, thanks in part to stronger business travel. Transportation service respondents said uncertainty was adding caution to their outlooks. Most expect stable conditions in the near term, with a modest pickup in activity next year.
Construction and Real Estate
New home sales stabilized somewhat after a significant drop off following the expiration of the homebuyer tax credit. Entry-level builders have pulled back on starts considerably after the run-up earlier in the year, but contacts say builders in higher price points are seeing some successful sales. Rising buyer cancellations were cited as a problem, however. Contacts in the new and existing home sector said demand will likely remain subdued in the near term because of tighter credit standards and uncertainty about changes in tax policy. Contacts said this uncertainty has led more potential buyers to rent, which has led to strong apartment leasing activity.
Commercial construction remains at very low levels. There is no speculative construction occurring, but hospital and education projects are keeping some contractors busy. Office and industrial leasing activity appears to have picked up. Contacts said very low rents were inducing firms to make new deals. Contacts said property sales continue to rise from very low levels, and investor interest remains high, especially for distressed sales.
Financial firms reported some pickup in lending activity. Consumer loan demand rose substantially, in large part due to growth in auto loans. Home mortgage activity picked up slightly as well. Despite high mortgage delinquencies contacts said they are not concerned with outstanding credit quality overall. Financial contacts noted increased pressure to price loans more aggressively and some have even begun altering loan structure somewhat, although overall underwriting standards remain very strict. Larger banks are reportedly seeing stronger loan demand than regional and community banks. There were reports of smaller banks passing up good owner-occupied real estate deals because of stricter enforcement of regulatory guidelines on commercial real estate.
Drilling activity rose at a slower pace over the past six weeks, in part due to a decline in natural gas-directed activity. The U.S. rig count edged up by 8 rigs and 41 percent of U.S. activity is now directed to oil. Eleventh District rig activity dipped slightly although contacts said drilling continues to increase in Texas' Permian Basin. Drilling services companies said business remains strong. Outlooks were optimistic, assuming a soft landing for the natural gas drilling industry. Contacts noted strong domestic land-based drilling and improved international demand has cushioned losses sustained in the Gulf of Mexico.
Overall agricultural conditions in the District remain very positive. Tropical storm Hermine brought substantial rainfall to Texas in early September, improving soil moisture in most parts of the state but causing flood damage in some areas. Above-average growing conditions resulted in good yields, and moisture conditions are favorable going into fall planting. Demand for U.S. agricultural products remains strong and commodity prices have gone up across the board, boosting optimism among producers. Cotton will be a boon for Texas agriculture this year, as a potentially record-setting crop is matched with near record-high market prices.