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In August and early September, Eleventh District economic activity expanded at a slightly faster rate than reported in the last beige book, and most contacts were optimistic about demand in coming months. Manufacturing activity increased at a slightly faster rate and retailers reported very good sales growth. Drilling activity continued to rise, although demand for oil field services remained tepid. Agricultural conditions were mostly favorable. Construction activity was unchanged. Credit conditions were stable with slightly increased loan demand and steady deposit growth. Demand for business and transportation services was steady and strong.
Prices for more goods and services rose than fell over the past six weeks. Tight labor markets led to wage increases at some firms in the glass, concrete, trucking, food and accounting industries. However, many companies continued to increase recruiting efforts and overtime rather than wages. One contact reported that due to tight labor markets, employee preferences have become a more important factor in firms' office location decisions. Costs for construction labor and materials have increased 5 to 8 percent this year. One contact reported a recent leveling off in construction wages, but prices continued to increase slightly for some construction materials, such as glass, wallboard, brick and primary metals. Paper and corrugated material prices rose 6 to 10 percent in the past six weeks. Prices of business services, oil, refined products, ethylene, polyethylene, timber and some semiconductors also rose. Refiners reported margins improved but were still "terrible." Prices of fabricated metals, hardwoods, motor vehicles, truck cargo services and most retail goods were steady. Concrete prices fell in a few areas of Texas with increased competition, but were steady elsewhere. Natural gas prices, after rising through August, have started to decline with the end of the summer cooling season. Apparel and some meat prices fell slightly. Contacts reported that softwood lumber prices, which had been relatively high for most of the year, fell slightly recently.
Manufacturing activity accelerated slightly in August and early September. Sales of semiconductors and communication devices picked up slightly, and contacts reported that demand in Asia continued to grow. Sales of gasoline, hardwood lumber products, primary and fabricated metals, some glass products and brick increased over the past six weeks. Strong demand for gasoline combined with refinery outages to reduce gasoline inventories for nine consecutive weeks this summer before they edged back up in late August. Plastics processors were struggling to rebuild their feedstock inventories after a series of unplanned outages reduced ethylene production earlier this summer. A few primary metals contacts said that sales growth has slowed with less demand from the construction and mining industries. Demand for food and paper products, wallboard, pine lumber products and concrete was unchanged over the past six weeks. Demand for apparel, as well as glass products used in commercial construction decreased slightly.
Demand for business and transportation services was steady and strong over the past six weeks. Temporary firms said that increased oil prices have led to increased demand for workers from the energy sector, but completion of many firms' Y2K compliance projects has dampened demand for customer service and information technology (IT) skills. However, legal and accounting firms continued to report strong demand for IT and Internet-related work, as well as transaction, litigation, bankruptcy and tax service work. Trucking firms reported "very good" levels of demand. Airline and railroad contacts reported increased competition.
Retailers reported very good sales growth, with a strong burst in sales thanks to the Texas tax holiday in early August. Inventories were generally in line with sales, although one retailer said inventories were lower than expected because sales were stronger than expected. Retailers were generally optimistic that sales will continue to be good, but a few were forecasting slower sales growth. Auto sales continued to be strong, at about the same level as in July.
Contacts reported stable credit conditions in the month of August with slightly increased loan demand and steady deposit growth. Lending growth was boosted by near-record auto sales, while real estate and home equity lending remained strong. Financial institutions reported liquidating other investments to fund new loans. While contacts reported concerns over media hype creating extra demand for cash in coming months, they said they will have enough cash on hand to meet Y2K needs.
Construction and Real Estate
Construction activity was unchanged over the past six weeks, with many projects running behind schedule due to labor and material shortages. Inventories of unfinished new homes rose while sales continued to increase. Office rents and occupancy rates were mostly stable, but there was some weakening in certain areas. One contact noted that increased HVAC and technology requirements in office buildings will speed the obsolescence of older buildings.
Drilling activity continued to rise in August and early September, but most new projects continued to be low-risk, onshore, shallow wells and directed to natural gas instead of oil. Due to the conservative nature of these drilling projects, contacts report much smaller increases in demand for oil field services relative to increases in drilling.
Agricultural conditions were mostly favorable. Grain storage problems were reported in many areas due to good yields and full elevators. Livestock conditions remained fair to good across Texas. Disaster payments have helped farmers recover from 1998 losses and most farmers expect a more profitable year than in 1998. But low commodity prices are keeping profits in check, and lenders are concerned with both the number of and credit worthiness of loan renewals for year 2000.