Economic Research Publications
Dallas Beige Book
March 2, 2011
The Eleventh District economy expanded at a moderate pace over the past six weeks. Activity in the energy sector remained strong, and staffing firms reported continued high demand for their services. Reports from the manufacturing and non-financial service sectors were mostly positive. Loan demand increased slightly. Conditions improved somewhat in the commercial real estate sector, while activity in the housing market remained sluggish. Severe winter weather stressed crops and ranching conditions and dampened retail sales.
Price pressures increased somewhat since the last report. Many contacts reported higher input prices for fuel, metals, and other commodities, and some shipping and manufacturing firms said they had increased selling prices in response. Retailers reported increases in the price of food and sundry items, while cement producers noted that they had announced selling price increases for spring 2011. Some service-providing firms noted continued downward pressure on bill rates, while staffing firms said they were successful in raising fees for direct hire placements.
The price of West Texas Intermediate (WTI) crude oil fell from $90 per barrel in January to about $86 in early February. Despite severe winter weather across much of the country, natural gas prices remained weak. Most petrochemical prices held steady during the reporting period, with the exception of increases in polypropylene and polystyrene prices.
There were increased reports of hiring activity compared with the previous reporting period. Staffing firms reported continued strong demand for their services. Some primary metals, fabricated metals, transportation, lumber, food, and high-tech manufacturers reported moderate employment increases. Accounting firms noted audit and tax work had prompted seasonal hiring. A few contacts in auto sales, legal, accounting and energy services expect to expand payrolls this year. In addition, retailers reported offering full-time positions to some workers that had been hired for the holidays, while others were laid off. Wage pressures remained minimal. There were, however, reports of higher wages at some firms in the accounting, airline and aviation industries, and high-tech manufacturers reported slight increases in wage pressures for high-skilled positions.
Overall demand for construction-related products was flat over the past six weeks, although there were a few reports of an uptick in demand related to remodeling, commercial construction and multifamily housing activity. Contacts expect conditions to remain unchanged or improve slightly this year.
High-tech manufacturers reported that growth in orders and sales picked up slightly. Demand was particularly strong from Asia and for products such as smart phones and other hand-held devices. Inventories were at or near desired levels. Most respondents expect demand to continue to increase at the current rate or at a slightly faster pace over the next six months.
Overall conditions in the paper products sector were largely unchanged since the last report. Aviation and aircraft parts manufacturers reported continued solid demand, and outlooks are for moderate growth over the next few months. Sales of emergency vehicles picked up and demand is stronger than year-ago levels, according to contacts. Demand for food products improved over the past month, and the three-month outlook for sales was optimistic.
Domestic demand for petrochemicals was stable or rose moderately, and margins were robust during the reporting period. Growth in exports of polyethylene and polypropylene slowed, while exports of caustic soda stayed strong. Domestic orders for PVC used in residential and commercial construction remained weak, but exports were solid according to contacts.Consumers have scaled back consumption of gasoline and diesel due to high prices. Refinery utilization rates have declined from 88 to 85 percent and margins are weak.
Severe winter weather adversely affected sales activity. Excluding the week of inclement weather, sales were flat to slightly higher compared with the previous reporting period. Discount retailers have seen year-over-year sales growth in the mid- to high-single digits, although about half of the increase in sales is due to higher gasoline prices. Contacts at discount retail firms noted sales of apparel and domestic goods strengthened recently. Overall inventories were at desired levels. The environment remains competitive but the outlook is for continued moderate growth in sales.
Demand for automobiles held steady, apart from severe winter weather that significantly reduced sales in early February. Demand is gradually picking up as business and consumer confidence improves. One contact noted that most of the improvement has been at the retail level and fleet sales have lagged. Dealer inventories are being kept in line with the pace of sales. Contacts remain modestly optimistic and expect sales to rise moderately this year.
Staffing firms reported continued strong demand, particularly for high-skilled IT positions. Other areas of strength were transportation services, insurance, healthcare, and banking. Direct hiring activity picked up pace, and outlooks remained optimistic.
Demand for accounting services has improved since the last report. One large firm noted that activity is strengthening across all service lines, particularly for consulting and transactional work. Despite the recent improvement in business, pricing remains competitive. Demand for legal services has picked up, and contacts expect reasonable growth in activity this year.
Reports from transportation services contacts were mixed, but mostly positive. Intermodal transportation firms noted cargo volumes declined due to weaker demand from international clients. Growth in small parcel shipments improved during the reporting period, and volumes were above year-ago levels. Railroad shipments and container trade volumes increased moderately since the last report. Airline traffic was steady over the past six weeks. Contacts noted that demand has improved from a year ago, particularly for business travel, and the outlook is for modest growth in sales in the near term.
Construction and Real Estate
Eleventh District housing activity remains sluggish, but contacts were slightly more optimistic in their outlooks. While comparisons with year-earlier levels are difficult because of the 2010 homebuyer tax credit, some contacts said traffic had picked up recently and that buyers were becoming more serious. Respondents noted tighter credit standards continued to hinder first-time homebuyer sales, although some realtors and builders noted sales in the higher-priced, move-up market had improved.
Commercial real estate activity improved slightly since the last report. Contacts said that while the sector remains fragile, there are signs that a recovery is beginning to take place. Office and industrial leasing rental demand edged up and contacts noted several deals in the works in Texas, with high-tech and energy-related firms leading the expansion. Commercial property sales remained at low levels, but some contacts noted a pickup in investor interest. Nonresidential construction remained subdued since the last report, and contacts do not expect a significant turnaround in the near term.
Financial firms report a slight uptick in overall loan demand. Commercial and industrial loan activity remains mixed, but demand for residential real estate loans has picked up from very low levels. Loan pricing is highly competitive, and contacts at community banks report increased competition from larger banks moving "down market" in order to attract new business. Credit quality appears to have stabilized and in some cases is improving. Increased cost of regulatory compliance is restraining lending activity, especially for community banks. Outlooks have improved slightly due to improving credit quality, some deposit run-off, and increased optimism regarding the overall direction of economic activity.
Drilling activity remains strong. Growth in the rig count has slowed as the disparity between oil and natural gas prices continues to shift activity away from natural gas and toward oil-directed drilling. Unconventional shale is the dominant factor driving U.S. drilling activity. Expectations are for the rig count to flatten out or decline slightly but margins are expected to remain strong through most of 2011. The rig count in the Gulf edged up during the reporting period, and there is little optimism about the short-term revival of activity in the Gulf as permitting remains slow for shallow and deepwater drilling.
Exceptionally dry conditions along with extended periods of below-freezing temperatures adversely affected the vegetable crop in Texas, greatly stressed livestock and necessitated increased supplemental feeding. Demand for agricultural commodities was strong. In particular, the relatively high price of oil spurred demand for corn for ethanol production. Prices of agricultural commodities remained high, and rose further for corn, cotton, soybeans and wheat. High costs for corn and feedstock has led to a slight decline in feedlot profitability.