October 21, 2009 Federal Reserve Districts Eleventh District--Dallas

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Economic conditions were little changed in the Eleventh District in September and early October, but there continued to be scattered signs of improvement. Activity remained flat at low levels across most sectors, with the exception of high-tech, food, petrochemical manufacturing and staffing industries, which saw a pickup in demand. The labor market remained weak and no notable pressures on wages or prices were reported. While contacts noted that they were seeing a bottoming out in activity, many were uncertain about the timing and strength of the recovery. Prices Price pressures remain subdued across industries. Most contacts said prices held steady, although service contacts noted increased pressure to discount fees. Construction costs continued to decline, and some contractors said they were willing to complete work for below cost just to keep the business. Most contacts said input costs remained steady over the past six weeks. Crude oil prices stayed in a range between $65 and $75 per barrel from mid-September to early October. Heating oil prices were seasonally weak heading into winter, as distillate inventories rose to 25 percent above the five-year average range. Natural gas spot prices in one key market briefly fell below $2 per Mcf but mostly remained in a range of $2 to $3.60 during the reporting period, some of the lowest prices since 2002. Natural gas storage has risen to record levels, and contacts are concerned that storage may fill before the heating season begins, putting even more downward pressure on prices. Labor Market Employment levels held steady at most respondent firms, with scattered reports of layoffs. Job cuts continued in the airline, energy, and construction-related manufacturing industries. In contrast, staffing firms noted continued broad based improvement in demand for contract workers, and respondents in trailer and brick manufacturing reported a slight increase in headcount. No notable wage pressures were reported, with the exception of downward pressure in skilled crafts in oil-related construction and maintenance. Manufacturing Most respondents in construction-related manufacturing said demand was flat at weak levels. The exception was in the primary metals industry where demand edged down due to minimal commercial construction activity. Outlooks were bleak as demand is expected to remain subdued, and there is idle capacity in the industry. Respondents in high-tech manufacturing said that production and new orders increased since the last report. Contacts noted that orders had picked up strongly from retailers and intermediate buyers that had sharply reduced inventories in the first half of the year. Demand from Asia was reported to be strong, and there was a better-than-expected increase in orders for products that contain logic devices such as netbooks and notebooks. Respondents expect demand to remain strong through year-end, although most expect growth in orders to level out in the first quarter of 2010. Conditions in transportation manufacturing remain weak, with one respondent noting "we are trawling at the bottom of the sea." Many expect flat demand in the near term, but are hopeful for a possible recovery in late 2010. Most respondents in the paper industry said demand continues to stabilize at weak levels, while food manufacturers said demand had picked up slightly and was better than a year ago. Petrochemical demand varied across products. Demand for polyvinyl chloride, which is used most often in construction products, is weak domestically. But export demand is very strong, boosted by the low cost of natural gas-based petrochemical products from the U.S. over oil-based ones supplied internationally. Still, the increase has not been enough to absorb excess capacity in the industry overall. Products sold into general manufacturing have seen improved domestic and export demand, and capacity utilization is on its way to returning to normal, according to contacts. Demand for oil products remains weak relative to a year ago, but is up from summer levels. Refiners reduced output due to poor margins and high product inventories. There were reports that planned projects, and even routine maintenance, were being deferred to conserve capital. Retail Sales Retail demand was largely unchanged from the last report, and sales in Texas continued to track the national average. Value-based retailers continued to note unexpected weakness in sales. Department store contacts said September sales were soft but more in-line with expectations. Retailers are nervous about how sales will turn out over the upcoming holiday season and are holding back on adding inventories and seasonal hiring. Automobile sales have declined sharply since the end of the cash-for-clunkers program. The program helped clear out old inventory and boosted dealer profits, but now that it has ended, car dealers are nervous about how long it will take before demand returns back to normal levels. Services Staffing firms say that demand continues to improve and orders are streaming in at a soft but consistent pace. Demand is concentrated in contract work, and orders for direct hires are "dead in the water," except at one firm which noted a pickup in its direct hire business. By and large orders are for sales, call center, healthcare administrative, and manufacturing positions. Although contacts are more upbeat this time around than the previous reporting period, the outlook remains cautious through mid-2010. Demand for legal services remains depressed, with the exception of regulatory, and pharmaceutical litigation and bankruptcy business. Legal firms report that receivables are slowing and getting more difficult to collect, especially from real estate clients. The outlook is bleak, and contacts note that if deal workout and litigation business does not pick up, "things could be ugly" by year-end. Contacts in accounting services reported steady, moderate demand. Intermodal firms report that falling import demand has led to a decline in cargo volumes over the last 30 days. Small parcel shipping and large freight volumes increased in September, continuing a trend that began in July. Shipping contacts report an improved outlook for the fourth quarter as they expect their clients to restock depleted inventories. Contacts in railroad transportation noted steady cargo volumes at low levels. Significant increases were observed in motor vehicle shipments due to the cash-for clunkers program, while pronounced declines were seen in shipments of lumber, wood, crushed stone and non-metallic minerals. Airlines say that business demand has stabilized at low levels. While revenue forecasts remain weak, there is growing optimism among most contacts. Construction and Real Estate Home sales continued to edge up over the past six weeks--boosted by the first-time homebuyer tax credit. Despite the uptick, new and existing home sales remain below year-ago levels. Homebuilders say conditions continue to show a bottoming out, with tighter inventories leading to some slight pickup in new construction. However, outlooks for any significant upturn remain uncertain. Realtors continue to report weakness in the higher-priced home market. Nonresidential construction activity continues to decline. There were several reports that the only "sure" business will come from government stimulus projects, although funding for such projects has been slow to materialize. Contacts noted hotel, apartment, industrial, retail and office sectors are overbuilt, and property values continue to move down. Respondents say it is still a struggle to get financing for new private commercial projects and for investment in existing properties. Scattered reports among contacts suggest the number of interested investors sitting on the sidelines is growing. Financial Services Conditions in the financial services industry deteriorated over the past six weeks. Contacts said loan demand weakened in September, after showing signs of firming in the previous report. Loan demand was disappointing across the board, especially for consumer loans and residential mortgages. Commercial real estate loans remained scarce. Contacts said they were maintaining tight credit standards, and noted that credit quality continues to deteriorate. Respondents remain very cautious in their outlooks, and some noted concern about upcoming changes in the regulatory environment. Energy The Eleventh District rig count rose in September and early October, spurred by oil-directed drilling. Despite the increase, contacts say excess capacity in the industry is leading to job losses and weak domestic pricing. Many international contracts, negotiated at the peak of drilling activity, are now rolling over, and relatively lower prices are putting pressure on company profits. The natural gas industry faces dire conditions with low prices and record high inventories. Agriculture Widespread rains in mid-September brought much needed relief to several drought-stricken parts of the District. Stock tanks were replenished and pastures greened up, allowing many ranchers to scale back costly supplemental feeding. The rain also aided planting of winter wheat; however, it came in too late to prevent devastating losses to the livestock industry and to dryland crops, which could top $4 billion. Although short-term moisture conditions have improved, long-term deficits persist in south and central Texas. Net farm income is expected to be lower in 2009 compared with last year due to low commodity prices and feeble global demand. Return to top Kansas City San Francisco