Economic Research Publications
Dallas Beige Book
December 1, 2010
The Eleventh District economy expanded at a modest pace over the past six weeks. Activity in the energy sector strengthened, and transportation services and staffing firms reported steady but solid demand. Retailers said apparel sales were slow due to unseasonably warm weather, while reports from the manufacturing sector were mixed. Activity in the housing market remained sluggish but conditions improved slightly in commercial real estate. Overall lending conditions were largely unchanged. Most respondents expect slow growth in the near term.
Selling prices and fees held steady at most responding firms due to competition and low sales activity, but there were some reports of increases. Small parcel shipping prices rose slightly while large parcel shipping prices increased sharply, according to contacts. Fabricated metals producers noted selling prices edged up in response to higher steel prices and primary metals manufacturers reported price increases were becoming necessary to offset higher cost of aluminum and other industrial metals. Agricultural respondents said crop prices increased across the board, and staffing firms reported upward movement in billing rates. Improved demand has enabled railroads to raise prices across various business units.
The price of crude oil rose moderately on stronger demand from China and a weaker dollar. On-highway prices of both diesel and gasoline increased. Natural gas prices remained weak as mild weather, record-high inventories and forecasts for a normal winter put downward pressure on prices. Solid demand, tight supplies, and multiple plant outages led ethylene producers to push through a 4 cent increase in contract prices for October, and spot prices rose sharply in response.
Employment levels held steady at most responding firms, and there were scattered reports of hiring. Staffing firms continued to report strong hiring activity in the region, and noted that they were adding workers in response. Some contacts in the airline, transportation services, automobile sales and transportation manufacturing industries added workers, and retailers were starting to ramp up hiring for the holiday season. Layoffs remained limited. Wage pressures were minimal, with the exception of reports of higher wages in the airline industry.
Demand for construction-related products was flat over the past six weeks, but a few manufacturers said sales rose due to an uptick in multifamily housing activity. Contacts expect conditions to remain weak or improve slightly in 2011 due to continued weakness in residential and commercial real estate. Fabricated metals producers saw a sharp increase in demand over the past month due to seasonal factors and government-related project work.
Most high-tech manufacturers said growth in orders and production continued at a much slower pace than in the first half of the year. Sales of some consumer products such as personal computers and laptops slowed, but demand for gaming products and smart phones remained strong. Several respondents expressed concern about reduced demand from the public sector as governments at all levels were faced with large revenue shortfalls. Still, most respondents expected conditions to remain stable for the next three months.
Demand for paper products held steady. Food manufactures said growth in orders was stable over the reporting period, and the three-month outlook for sales was positive. Trailer manufacturers reported a slowdown in demand. Contacts in aircraft parts distribution and manufacturing saw an increase in demand due to higher utilization of aircraft fleets and deferred maintenance work.Demand for petrochemicals was solid. Ethylene and polyethylene producers reported that domestic demand increased moderately, and export demand stayed strong--driven by cheap natural gas versus relatively expensive oil and a weaker dollar. Domestic orders for PVC used in residential and commercial construction remained depressed, but exports were strong, according to contacts. Demand for petrochemicals used in manufacturing, alumina, pulp and paper improved.
Refiners said conditions remained weak. Demand for oil products continued to decline and refiner margins were being squeezed by the rise in oil prices. Refinery utilization rates stood just above 80 percent, down from 90 percent this summer.
Eleventh District retail sales grew modestly, despite unseasonably warm weather that impacted apparel sales for much of the reporting period. In recent weeks, however, clothing retailers noted sales improved as temperatures fell to more normal levels. Two large retailers said that their sales in Texas outperformed those nationwide. Inventories increased slightly due to the warm weather and some seasonal buildup. The retail environment remains extremely competitive, and contacts say they still have to lure consumers with promotions. Expectations are for the holiday shopping season to yield moderate year-over-year sales increases. Contacts expect continued improvement in 2011, although most expect the pace to be slow to moderate.
Automobile sales were slightly weaker over the reporting period, by more than normal seasonality would suggest. Inventories rose, but remain at healthy levels, according to contacts. A typical slowdown in sales is expected heading into the holiday season, but the outlook for next year is cautiously optimistic, with most contacts predicting modest growth in sales.
Staffing firms reported steady demand, and noted that activity was stronger than expected. Demand continued to be broad-based, with particular strength reported for oil field operations, administrative and professional services, plastics and steel manufacturing, and automobile-related positions. Direct placements, which had been subdued so far this year, increased during the reporting period. Sustained high levels of demand continued to boost the near-term outlook.
Accounting firms said some increase in consulting and merger and acquisition work has kept demand stable. Uncertainty regarding impending tax legislation continued to constrain demand for transactional services, but contacts were generally optimistic about year-end earnings. Demand for legal services remained soft. The only area of increased activity is mergers and acquisitions. Legal firms say they are in a better position than last year, but remain cautious in their outlooks.
Transportation services demand was positive. Intermodal transportation firms noted a wide-spread increase in cargo volumes was buoyed by demand from international clients. Railroad contacts said continued solid gains in volumes boosted revenues. International container trade volumes rose slightly during the past four weeks, and contacts expect a modest pickup in container traffic next year. Firms that ship small parcel goods said growth in volumes flattened during the reporting period, but remained above year-ago levels. Airline traffic was steady over the past six weeks. Contacts noted that conditions are much better than a year ago, and the outlook is for modest growth in the near term.
Construction and Real Estate
Housing markets remain sluggish. Builders said sales weakened slightly in October after some firming in August and September that followed the homebuyer tax-credit drop off. While entry-level builders were said to be struggling, builders in the move-up price range have weathered the post tax-credit conditions better, according to contacts. Realtors also said the higher end of the market is selling better, a reversal of the late 2009 and early 2010 trend. Prices were up slightly from year-earlier levels. Respondents said lenders still require a 20 percent down payment in most cases, which may be more difficult for the entry-level homebuyer. Outlooks are for sales and building activity to remain slow in the near-term.
Apartment demand continued to rise steadily during the reporting period, and occupancies edged up. Rents are moving up, according to contacts. Construction activity remains low by historical standards, but it has picked up slightly in recent weeks. Investment activity for multifamily properties has risen since the last report.
Office leasing continues to edge up, which is "giving people a little more confidence," according to contacts. Respondents in the industrial sector also noted increased lease deals, but said rents are near historic lows. Excess space and tight credit conditions have limited nonresidential construction. Investment activity remains subdued, but contacts say recent signs of economic improvement should enable more risk-taking in the near term.
Financial firms reported a slight pickup in demand for selected loan types and a continued tapering off for others, noting that demand remained very price sensitive. Consumer loan growth was modest, but dependent on low rates. Demand for commercial and industrial loans increased, although real estate loan demand continued to decline. Overall credit quality was stable; however, mortgage delinquencies and mortgage bankruptcies remained elevated. Financial contacts noted continued pricing pressure, particularly for consumer and good-quality business loans. Deposits were stable. Outlooks improved modestly, but contacts anticipate loan growth to remain sluggish because of economic and public policy uncertainties, as well as borrowers' poor credit ratings.
The Eleventh District rig count rose strongly over the past six weeks. The disparity between oil and natural gas prices continued to drive the trend toward more oil-directed drilling. U.S. land drilling is the strongest and most profitable segment of the industry, especially activity tied to horizontal drilling. Contacts expect the overall rig count to level off or increase at a slower pace through year-end as the decline in dry natural gas activity is not being offset by increased oil-directed drilling. Producers are interested in returning to the Gulf now that the moratorium is over, and are working their way through the new regulations and their cost implications. Service companies are maintaining the skills and capacity to go back to the Gulf, but do not expect it to happen before early next year.
Topsoil moisture was short in several parts of the District, and moderate drought conditions prevailed in East Texas and along the Rio Grande. Ranchers were concerned that lack of rainfall was hampering winter grazing and hay production. Higher grain prices boosted margins for farmers but increased feed costs for livestock producers. Cotton prices were at record-high levels, and estimates for Texas cotton production put this year's crop near historic highs for the state. Demand for agricultural products remained strong, with particularly robust export demand for cotton and beef.