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August 29, 2012 · Dallas Beige Book Reports

The Eleventh District economy grew at a moderate pace over the past six weeks. Manufacturing activity continued to expand, demand for business services remained solid, and transportation services activity increased. Respondents said retail sales edged up, while automobile sales held steady. The housing and commercial real estate markets remained healthy. Financial firms noted softening loan demand. Energy activity remained robust, and agricultural conditions improved slightly. Employment levels were steady to slightly higher. Wage and price pressures were modest. Most contacts noted that European debt issues and the upcoming national elections added uncertainty to their outlooks.

Prices
Most contacts said prices held steady, although some construction-related and vehicle manufacturers noted slight increases, and accounting and staffing firms reported a modest rise in billing rates. Paper product manufacturers and shipping firms noted plans to implement price increases in the near term. Overall, input costs were flat to up during the reporting period. Prices for scrap metal, steel and grains rose. Contacts reported that the rising cost of labor and land prices have increased builders' costs, and some were raising prices on new homes.

The price of WTI rose from $85 in early July to $94 in mid-August. Natural gas prices remained depressed. The price of diesel and gasoline climbed about 30 cents, and prices of petrochemical products were flat to up over the reporting period.

Labor Market
Employment levels edged up or held steady at most responding firms. Staffing firms reported demand softened slightly from high levels and noted rising demand for mortgage refinance specialists, sales professionals and plastic product manufacturing workers. Reports of slight employment increases came from some automobile dealers, construction-related products manufacturers, transportation equipment producers and transportation service firms. A few respondents noted difficulty filling vacant positions because of employment opportunities available in the energy sector, and contacts reported delays in housing starts because of labor shortages. Wage pressures remained minimal, although upward pressure was reported for construction workers, truck drivers and accountants.

Manufacturing
Overall demand for construction-related products held steady or edged up since the last report, but outlooks were cautious. A cement producer noted that increased residential construction activity, particularly in South Texas, had improved demand. Fabricated metals producers noted an uptick in orders, largely stemming from both public infrastructure projects and private construction activity such as high rise residential buildings and warehouse facilities. Demand for primary metals was steady over the past six weeks, and expectations were for business to remain flat through year-end.

High-tech manufacturers said orders were flat to slightly up over the reporting period. Contacts reported that conditions in the semiconductor industry were better in the U.S. than in other parts of the world. This is largely because U.S. production centers on logic devices that are experiencing stronger demand than memory devices, which are primarily produced outside of the U.S. Most respondents noted that increased uncertainty will likely be a drag on demand through year-end.

Demand for paper products remained steady, although contacts were uncertain about what will happen over the next few months, particularly with regard to potential tax changes after the November election. Food producers said demand experienced a seasonal increase over the past month, but sales were lower than a year ago. Overall, transportation equipment manufacturers said demand was flat to up over the past six weeks. Demand for aviation equipment held steady at low levels. Outlooks were less optimistic compared with the last report partly due to continued weakness in demand for parts and repair of existing aircraft. A producer of recreational vehicles noted a pickup in sales, and an emergency vehicle manufacturer reported continued strong demand.

Petrochemicals producers reported steady demand. Demand for PVC, tied to residential construction, improved domestically, and exports continued to be a major source of sales. Exports of caustic soda remained strong as U.S. prices are very competitive due to lower electricity costs. Chlorine demand edged up, while demand for propylene weakened. Gulf Coast refiners said operating rates remained high at 90 percent. Robust export demand for gasoline and distillates kept inventories low, and refiners' margins remained healthy.

Retail Sales
Retail sales grew slightly over the reporting period and were up from a year ago. Particular strength was seen in sales of accessories, cosmetics and women's and children's apparel. Sales growth in the Eleventh District remained stronger than the nation, on average, according to two large retailers. Retailers expect a seasonal pickup in demand in the fourth quarter, although sales will likely be down from last year.

Automobile sales were mostly flat since the last report, but were up from year ago levels. Inventories were lighter than desired. Contacts said political uncertainty was hampering consumer confidence, and outlooks were cautious.

Services
Staffing firms said demand slowed slightly over the past six weeks. Still, activity remained at high levels and business was stronger compared with last year. Outlooks remained positive, yet there was concern among contacts about uncertainty stemming from the upcoming presidential election. Accounting firms noted continued seasonal weakness in overall demand but said activity related to the energy industry remained a bright spot, and outlooks for energy-focused areas were particularly upbeat. Legal firms reported a continued pickup in demand, with sustained strength in intellectual property litigation, energy and real estate-related services.

Reports from transportation service firms suggested a slight increase in activity. Trucking firms said cargo volumes increased over the reporting period, partly due to more oil and gas-related business. Railroads said volumes increased since the last report. Contacts noted shipments of two of the largest categories for rail cargo—grain and coal—declined, while volumes for lumber, petroleum products and motor vehicles increased. Container volumes and small parcel shipments picked up during the reporting period, while air freight activity declined in part due to a slowdown in international cargo volumes.

Airlines noted slight softening in passenger demand in part due to seasonality and a decline in travel to Europe. Demand for travel to Mexico picked up, while travel to Latin America and Asia held steady. Domestic demand remained strong for both leisure and business travel. Contacts expect weaker passenger demand over the next few months but noted it will likely remain near last year's levels.

Construction and Real Estate
Housing activity remained strong since the last report. Contacts said sales of new and existing homes continued at a good pace and were well above expectations. Builders noted strong traffic and reported rising backlogs, while realtors said shrinking inventories had led to price gains. Apartment demand remained strong, and contacts noted rising construction activity as investors continue to be attracted to the market. Housing outlooks remain positive.

Office and industrial real estate fundamentals remained healthy over the past six weeks. Leasing activity continued at a good pace and some contacts noted a pick-up in property sales. Outlooks were optimistic but cautious. Since the last report, there were a few signs that investors were becoming less aggressive in pursuing commercial real estate deals, outside of multifamily.

Financial Services
Overall, loan demand softened somewhat during the reporting period. Corporate lending activity remained weak, while residential real estate loan demand rose strongly. Loan pricing remained competitive and deposits continued to grow. The quality of outstanding loans continued to improve slowly as nonperforming loans declined. Outlooks were positive, but contacts expressed concern about European debt issues, new regulations for community banks and the upcoming national elections.

Energy
Respondents at energy-related firms said overall activity remained at high levels, with long lead times and growing backlogs. Drilling activity continued to shift from dry natural gas to oil and natural gas liquids. While the shift has not affected overall activity levels, contacts expect a plateau in the growth of rig activity through year-end, in part due to recent weakness in the price of natural gas liquids. Oil-related activity continues to be strong, and contacts expect continued improvement in offshore drilling.

Agriculture
Drought conditions improved slightly due to scattered rainfall in July. Crops remained mostly in fair to good shape, with the exception of dryland cotton crop in the Texas High Plains region which suffered due to lack of moisture. Overall, crop conditions were much better than a year ago. Drought in the Midwest has caused grain prices to climb sharply, squeezing margins for ranchers by driving up feed costs for livestock.

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