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Federal Reserve Districts


Eleventh District - Dallas

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Summary

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The Eleventh District economy continued to expand in late March and early April, and in most industries, contacts expressed increased confidence in the strength of their outlook for the rest of the year. Manufacturing activity was up slightly, with several industries reporting improving sales. Retailers said sales growth continued to exceed expectations in March and early April. Construction activity also continued to increase, and contacts said building was constrained by labor and materials shortages. Business service contacts and financial institutions reported little change in activity since the last beige book. Agricultural conditions remain difficult, with low commodity prices and concerns about dry soil. More farmers are expected to quit production this year.

Labor Markets
Labor markets remained tight in most industries. Some firms reported scattered wage increases, but other firms are choosing to offer bounties, hire recruiters or expand their searches rather than raise wages. One retailer said the company was able to raise base wages while lowering selling prices because recent sales growth had increased productivity per worker. They are anticipating further productivity increases because they expect to reduce costs associated with turnover, such as search and training expenses. Service sector contacts said wages continued to increase at the same pace reported in the last beige book, but fees were increasing more than wages.

Prices
Several manufacturers reported price increases for products, such as gasoline, food semiconductors, liner board, boxes and paper. Contacts report that paper inventories are low and prices are expected to increase further. Energy prices were up over the past 6 weeks. Oil prices rose sharply during March, as Saudi Arabia, Mexico, Iran, Venezuela and Kuwait agreed to cut production. Futures prices suggest that market participants expect this agreement will hold, but contacts expressed concern that if the OPEC agreement doesn't hold prices could fall as rapidly as they went up. The wholesale price of gasoline jumped from 34 to 54 cents per gallon during the month of March, pushed up by planned and unplanned refinery outages, as well as by increased demand from distributors refilling storage in anticipation of prices increases. Natural gas prices moved up with oil, rising to nearly $2 per thousand cubic feet on the spot market. Increases in fuel prices were starting to put upward pressure on fares, according to transportation firms.

Some manufacturers reported price declines. Heavy competition has turned the pager into a commodity, according to contacts, and price pressure is severe. There is still some downward price pressure on metals, particularly for alloys such as nickel and ferrous silicone, although producers say low inventories may keep prices from dropping. Inventories were reported to be particularly low for primary metals because production was cut back when prices started to fall. Most petrochemical prices remained weak--under pressure from significant overcapacity. Ethylene and polyethylene prices rose by a nickel per pound or more because planned and unanticipated outages pulled inventories down to low levels for many plastics producers, but these prices are expected to fall again in a couple of months.

Manufacturing
Manufacturing activity increased slightly over the past 6 weeks, with several industries reporting improving sales. Paper producers said demand accelerated for corrugated boxes during the past 2 to 3 months, and liner board exports have recently picked up. Contacts believe worldwide inventories have fallen because many of the paper mills took maintenance downtime while supplies were high. Apparel manufacturers reported increased demand, but competition from less expensive imports remains intense. Demand for food products was up solidly, and contacts are optimistic about future sales growth. Domestic demand for most petrochemicals was extremely strong over the past six weeks, and gasoline sales surged. Brick and cement sales continued to be very strong, and contacts said the sales outlook was strong, particularly for cement, thanks to the Federal Highway bill. Contacts reported no change in demand for metals, with the exception of a producer who sells to the construction industry, where sales are very strong. Semiconductor sales weakened a little during the past month, although sales remain much stronger than a year ago. Contacts reported that world demand for semiconductors is starting to pick up, and capacity has been reduced, helping boost revenue and prices. Still, industry contacts remain cautious in the improving outlook, noting that Y2K and the proliferation of low-margin computers adds to future uncertainty.

Services
Business service contacts, such as consulting, accounting and legal, reported little change in activity over the past month. Demand was down for services associated with Y2K and the energy sector, but demand was up for services associated with the high tech, telecommunications, finance, utilities, global transactions and the Internet. Airlines said passenger traffic remained strong despite higher fares. Most shippers also reported good demand, with the exception of a contact who ships products which fill less than a full truckload.

Retail Sales
Retailers said sales growth continued to exceed expectations in March and early April, but some said growth was not as good as they reported in January and February. Contacts say consumers are very confident. As one said, "consumers are spending money they don't have, and they aren't concerned about it." Most retailers remain very optimistic about the sales outlook, with the exception of in Houston, where some retailers said sales growth has shown some softness. Demand for automobiles remained strong, particularly for sport-utility vehicles, trucks and used cars.

Financial Services
Financial institutions reported a strong first quarter, and contacts say conditions have not changed appreciably during the past six weeks. Lending was up strongly for all loan categories, except commercial lending and to the energy sector. Commercial loans are becoming competitive, according to contacts, and net interest margins are under pressure for those banks with a portfolio primarily focused on commercial activity. However, credit unions and others who focus on retail activity reported strong gains and increased demand. Y2K is the main concern expressed from contacts, particularly small and rural institutions, who said that customers are beginning to call with questions.

Construction and Real Estate
Construction activity continued to increase. Contacts reported that shortages of labor and materials caused delays in new homes and apartments. Drywall shortages were particularly acute in Houston. New home sales were still "very strong" with some builders reporting record sales. New home prices were up 3.5 percent to 6 percent in the first quarter, according to builders, but they said these increases were absorbed by higher costs for labor, materials and interest payments. Delays in apartment construction have postponed an expected decline in occupancy rates in Dallas. Dallas office occupancy rates have declined as many new buildings are completed, but occupancy rates continued to increase in Houston.

Energy
Overall drilling activity did not increase with higher oil and natural gas prices. The domestic rig count slipped under 500 rigs for the first time ever and has stabilized near 500 over the past month. Oil-directed drilling picked up some, but natural gas drilling has continued to decline. Contacts expect drilling could pick up by this summer or fall, if higher energy prices hold. All contacts mentioned that producers had debt to pay down before drilling would rebound.

Agriculture
Low commodity prices and a heavy debt burden continue to threaten the viability of many of the region's farmers. A lack of winter precipitation damaged some of the Texas wheat crop, and production estimates are 30 percent lower than the 1998 crop. Conditions remain dry in many areas, and grazing of wheat pastures is less than expected. Still livestock conditions remained mostly good.

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Last update: May 5, 1999