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Federal Reserve Districts

Eleventh District - Dallas

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In December, Eleventh District economic activity remained strong. The service sector reported strong demand, and most retailers said sales were strong. The energy industry continued to rebound, but there were signs of cooling for refining and petrochemicals. Construction and real estate activity also was quite strong, with the exception of home building, which was "slower than usual." Manufacturers reported activity at roughly the same level reported in the last Beige Book, but there were signs of weakening for some construction-related products. Lending activity was unchanged, and deposit growth was up. Agricultural conditions remained dry.

Price pressures were mostly neutral, with some upward pressure from higher oil prices but downward pressure from petrochemicals and some construction inputs. The construction industry reported a significant easing in price pressures for sheet rock, cement, and concrete, which were in short supply a year ago. Lumber selling prices have increased slightly but are lower than a year ago because dry weather has made logging easier. As Y2K concerns eased, petrochemical producers reduced inventories, which ended price increases begun last summer and reduced the price of polyethylene. Margins for major product--such as ethylene, propylene and styrene--are all below the level of a year ago. Oil prices increased from $23 to $26 per barrel in the past few weeks. Transportation firms have used hedging to mitigate fuel price increases, but their margins are down, and contacts are concerned about higher fuel prices. Some have instituted fuel surcharges, and others are considering surcharges. Refiners say they have been unable to increase product prices enough to make up for rising crude prices, leading to very poor refining margins. Contacts say prices for oil field equipment and services remain very competitive, with no significant increases. Day rates for offshore rigs and supply boats have bottomed out, however, and have begun to turn around slightly.

Labor markets have eased in some areas but continue to be very tight in parts of the District, particularly in Austin and the Rio Grande Valley, where contacts say it is difficult to find skilled labor and wages are up. Auto dealers reported difficulty finding workers, and legal and trucking firms say they have raised salaries. Temporary service firms also reported very tight labor markets, but wage increases have been only "minor," which one contact called "surprising." Construction contractors, such as framers, were looking for work in December after being in very high demand for the past few years.

Manufacturing activity remained strong in December, but some industries saw signs of weakening. Demand continues to be fairly strong for electronics and electrical equipment, particularly for communications devices. Food manufacturers reported little change in demand, with the exception a canned goods producer who noted a slight Y2K-related increase. All food manufacturers said they were happy that inventories were quite low. Paper producers said demand was up for all types of products. Demand was boosted by customers double-ordering toilet paper and napkins for Y2K stockpilers. Demand for construction-related manufactured products was mixed--with some reporting continued strong sales and others weakening sales. Lumber producers say unusually warm weather and anticipation of increasing interest rates has kept demand strong and up slightly from last year. Demand for metal, glass and brick has also been strong. One brick company said they had the "largest number of deliveries and backlog ever at the end of the year," which led to low inventories. Demand for cement and concrete in residential building has softened slightly in the last few weeks, however, down roughly 5 percent from last year. Refining is also seeing some signs of weakening. Weaker-than-expected demand and warmer-than-hoped-for weather has resulted in high inventories of petroleum products. Holiday travel was below normal levels according to contacts, and homeowners seemed to have stocked up on fuel oil in November, which led to disappointing demand and poor margins in December. Gulf Coast capacity utilization held steady, but cuts in production are likely in coming weeks. Demand for petrochemicals remained strong in December, with domestic demand at very high levels and foreign demand continuing to improve.

Temporary firms reported very strong demand for their services in December. One firm said it has been the "best December in ten years" and the "best quarter in recent memory." Demand from retail and manufacturing firms was unusually strong according to contacts. Manufacturing activity usually slows for a week or so in December, they said, but only slowed for 2-3 days this year. Rising oil prices boosted demand for temporary workers in parts of the energy sector, particularly in Houston. Workers with technical and computer skills continued to be in high demand, but contacts reported fewer IT-related jobs, which they attributed to Y2K activities wrapping up. Legal firms also saw continued strong demand for their services, despite a typical December slowdown in litigation activity. Transaction activity was good, especially mergers and acquisitions. Real estate activity was also strong, but contacts expressed concern that higher interest rates could slow activity. Transportation services reported weak passenger demand in December--with airlines reporting a greater than usual number of cancellations, which they attributed, in part, to Y2K concerns. Rail and trucking firms said that cargo shipments were unusually strong, which trucking firms attributed to firms filling their inventories for Y2K. Transportation firms reported unusually high uncertainty about the outlook for the coming weeks, in part, because they are unsure if people were stocking up for possible Y2K disruptions, which would result in fewer shipments in the first quarter.

Retail Sales
Retailers reported strong sales, with some reporting "phenomenal" sales, but others were disappointed by demand. Internet sales were explosive. Retailers said inventories are in very good shape, but some with Internet sites continue to hold a lot of inventory because they intentionally brought in huge amounts of product prior to Christmas to ensure they would be able to fill orders. They said there was little risk in pre-holiday inventory building because the industry is fast growing, and they expect to work off the excess inventory as more consumers turn to the web. Auto dealers reported a strong December, with strong demand for all aspects of the business, including new and used vehicles, service and parts, with particularly strong sales of SUVs and trucks.

Financial Services
Financial institutions saw no significant changes in lending activity. Deposit growth was up, which contacts believe is partly because of year-end bonuses, partly because of rising interest rates, and partly because money that was withdrawn for Y2K is returning to the banking system. Bankers reported strong profits for the year, although contacts expressed concern that further interest rates increases would cut into profits.

Construction and Real Estate
Construction activity remained quite strong, with the exception of home building, which was "slower than usual" in December but showed signs of picking up some in the first week of January. Builders attributed slower new home sales to higher mortgage rates and possibly Y2K preoccupation or concerns. The inventory of homes remains very tight. Contacts said warehouse activity was particularly hot, but office, commercial, and industrial activity also was quite strong. Multifamily building has pretty much dried up according to contacts, who say that banks have cut off all financing. Developers note there is a lot of money looking for deals, but they aren't building without a buyer.

The energy industry continued to rebound, with the rig count up 60 percent from the trough last April. The gains have been in drilling for natural gas, which has reached near peak levels. Oil drilling has not yet rebounded, however, which a contact attributed to distrust that OPEC will sustain prices. Until recently, drilling has been mostly shallow, onshore, and vertical, which has not demanded many resources. Recently, however, drilling has picked up in the Gulf of Mexico and gone deeper. In addition, international drilling may be set for a rebound.

Conditions remained dry, although snow and rain helped improve wheat growth and pastures in some areas. Harvest of citrus, vegetables and the remaining summer crops continued, as well as land preparation for 2000 crops. Livestock conditions continued to decline, and herd reduction became more widespread. Ranchers are hauling water to livestock and increasing supplemental feeding--including burning the stickers off prickly pear cacti so livestock can eat them.

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Last update: January 19, 2000