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Federal Reserve Districts

Eleventh District--Dallas

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Eleventh District economic activity was mixed from mid-February through mid-April. The energy industry, including energy-related manufacturing, picked up strongly. But other manufacturing activity was mostly flat or down. Activity in the service sector was also mixed. Retailers reported a drop in sales. Construction and real estate markets continued to be soft, and the financial service industry reported little change in activity. Overall agricultural conditions remained relatively stable in the last seven weeks.

Contacts vary in their outlook for future activity. There is optimism in some industries that activity will pick up soon, as uncertainty surrounding the war dissipates. Other contacts are more pessimistic about the outlook than they were a few weeks ago. These contacts expressed concern that the economy is not necessarily going to bounce back quickly after the war because businesses are very reluctant to make capital investments until they are certain demand is picking up in their industry.

Price pressures were mixed since the last Beige Book. There were some reports of downward price pressure for goods, such as for aluminum products and scrap metal. Energy prices remained high but have fallen since March. Inventories of crude oil, which had reached the lowest levels since 1974, are being rebuilt in the last couple of weeks. Gasoline consumption has been near the top of the five-year range, while inventories are near the bottom of that range. The inability of refiners to build gasoline stocks in early spring is expected to keep gasoline prices high for much of the summer. Cold weather in the Midwest and New England areas caused the Henry Hub price of natural gas to spike to $16.00 per thousand cubic feet in late February. Strong demand has kept natural gas prices above $6.00 per thousand cubic feet for more than two weeks. Natural gas inventories were 50 percent higher than their five-year average as the heating season began, and 50 percent below average as it ended. Higher energy costs have also pushed up prices for plastics, chemicals, paper, and plastic packaging.

There continue to be widespread concerns about high insurance costs. Accounting firms have increased fees to accommodate rising insurance costs and additional work imposed by the regulatory changes from the Sarbanes-Oxley bill. These firms say that their customers are having difficulty passing these higher fees on to their selling prices.

Several contacts noted that wage pressures had lessened or the company was offering smaller wage increases. Contacts say that temporary workers are commanding far lower salaries, particularly for sales and marketing, where yearly salaries have dropped from $80,000 to $65,000.

Overall manufacturing activity was mixed, with a pickup in energy-related activity but little signs of growth in other sectors. While there had been a slight increase in demand for a few construction-related products, sales of most construction-related products were soft and contacts expect demand to weaken as building continues to soften.

Conditions in high-tech manufacturing were flat. Contacts said the biggest obstacle to a significant turnaround continues to be weak capital spending by businesses. One respondent noted that SARS is having significant supply and demand effects in Asia, and one of their factories in Asia had been shut down for at least 10 days after a worker became infected with the illness. Overall inventory levels were reported to be lean, and productivity gains were helping to improve profits.

Demand for fabricated metals has been flat during the past six weeks and slightly down from a year earlier. Contacts said that private investment was very weak, but public spending (on construction projects) was helping to buoy demand. Demand for primary metals was also flat to down over the past six weeks, which contacts attributed to a lack of business investment due to the war and stiff competition from China. The demand for lumber has increased slightly over the past month, but contacts expect a slowdown as home building cools. Contacts in the stone, clay, and glass industries said the demand has risen over the past six weeks.

Demand for food products has slowed over the past month, and contacts say their customers are being cautious in their ordering because of the war. Demand at "white table cloth" restaurants has weakened, they say, but "middle of the road" restaurants are making up for it. Demand for paper products has been "light." Paper producers say competitive pressures have been stiff, and heavy inventories have led some companies to reduce production and lay off employees.

Strong demand and profits have led refiners to run at high levels of capacity utilization--higher than 90 percent--in recent weeks. Refineries are postponing or minimizing the normal spring turnarounds to switch from heating oil to gasoline. Demand for petrochemicals has also been strong, particularly for products tied to construction. However, high natural gas prices have led some energy-intensive plants to shut down, and all plants have struggled to pass through the increased cost of production. A substantial increase in basic chemical and plastic production was reported in early April after natural gas prices fell below $5 per thousand cubic feet.

Demand for temporary workers remained strong overall. There has been a sizable increase in demand for workers to supply durable goods manufacturing, call centers, and technology, but demand has weakened for clerical and administrative support workers. Legal firms reported little change in demand for services to support regulatory, litigation, and bankruptcy work. Demand continues to be virtually nonexistent for mergers, acquisition, or venture capital activity. Accounting firms say demand remains strong from energy, construction, and financial sectors, as well as additional work to support the regulatory changes imposed by the Sarbanes-Oxley bill.

The airline industry continues with its struggle to find the road to solvency. Demand for air travel fell as the war in Iraq started; international travel, which was also hurt in areas affected by the SARS virus, was particularly hard hit. Some carriers have temporarily suspended flights to SARS infected areas. Wage reductions and additional layoffs are reducing costs, but costs continue to rise due to a snowstorm in the Northeast and hail damage in Texas. As one contact noted, "we can't get a break."

Trucking activity improved markedly over the past four to six weeks. Rail shipments were also higher than year-ago levels, with significant increases in shipments under the category that includes military traffic.

Retail Sales
Retailers reported that when the war became imminent, sales dropped between 3 percent and 5 percent on a store for store basis compared with last year, after adjusting for the movement of Easter. Sales of women's apparel have been particularly weak.

Automobile sales in the District remain below year-ago levels, although the so-called "CNN Effect" appears to have lifted since the start of the war with Iraq.

Financial Services
Overall activity remains unchanged. Deposit growth is still relatively strong, which contracts attribute to continued uncertainty over economic conditions. Loan demand has been mostly stable. Auto lending remains slow, despite several attempts by auto manufacturers to entice new buying. Real estate lending is still strong, mostly due to refinancing activity.

Construction and Real Estate
Nonresidential markets continued to be very weak since the last Beige Book. The single-family market was mixed; sales of homes priced below $175,000 or above $1 million are strong. "Caution prevails" in office markets but several contacts suggested that they believe the market has hit bottom.

The U.S. rig count pushed up from near 900 to 972 in recent weeks. Higher natural gas prices and expectations that they will be sustained have stirred up substantial interest in domestic drilling. Respondents are forecasting a substantial increase in the rig count ahead, perhaps as high as 1,200 before running into labor or resource constraints. So far, the additional drilling is relatively unsophisticated--with few signs of a pickup in difficult areas, such as deep Gulf of Mexico. Contacts report the lack of drilling in the shallow Gulf may be related to pending government subsidies, but that there is substantial interest in the deep waters of the Gulf in the months ahead. International drilling remains unchanged, with the downside risk for oil perceived as much greater than for natural gas.

Strong spring rains continue to improve moisture conditions in parts of the District, although other areas remain dry. Higher cotton prices have encouraged more planting of that crop compared to last year. Feeder cattle continue to sell for near record highs.

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Last update: April 23, 2003