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Federal Reserve Districts

Eleventh District--Dallas

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Eleventh District economic activity showed signs of improving from mid-April through May, but the rebound is slow and inconsistent. The energy industry continues to strengthen, with growing optimism that demand will continue to pick up. The service sector is showing scattered signs of improvement. The financial services industry reported that conditions are unchanged to slightly improved. Manufacturing activity was still mixed, however, and retail sales remained weak. Construction activity continued to soften, and real estate markets remained weak. Dry conditions have hampered agricultural production.

Price pressures were mixed. Crude oil prices were sharply lower following the start of the Iraq war and then rebounded slightly. Prices for West Texas intermediate crude oil are nearly $10 per barrel lower than they were before the war, but inventories are 12 percent below last year--outside what the Department of Energy regards as a normal range. Natural gas prices rose from $5 to $6 per million Btu over the past six weeks and are expected to remain high through the rest of this year. Prices for most petrochemical products have pushed up to record levels as producers attempt to cover the high cost of natural gas and other feedstocks. Other industries reported that competition was pushing prices downward, particularly for retail products. There were widespread reports of rising cost pressures, however, particularly for transportation and all types of insurance.

Labor Markets
Layoffs continue at some large employers in the Dallas-Fort Worth area. There are reports of downward pressure on wages in several industries, but some contacts say that the labor market is still too tight to allow the wage reductions they would desire.

Manufacturing activity continues to be mixed. Energy-related activity remains relatively strong, but production of other manufactured products is mostly unchanged. There were some scattered signs of improvement, but contacts say it is weak and uneven. Defense manufacturing continues to increase, although hiring has slowed.

There was little change in demand for paper products, stone, brick, glass, apparel, and food products. Demand for primary metals was also unchanged, but that was counter to the normal seasonal pickup that occurs this time of year. Demand for lumber has been slightly improving, but the industry is still reporting losses because excess capacity is eliminating pricing power.

Conditions in the high-tech sector were mixed, with some respondents reporting slightly weaker sales while others reported a slight improvement. One respondent noted that international demand has weakened because of SARS and the earthquake in Japan. Another contact noted that sales have been flat over the past three months and the expected pickup is not happening. A respondent in the semiconductor industry reported slight gains in sales and noted that growth is occurring without an increase in jobs; firms are interviewing more, however, and he expects net job growth in thirty to ninety days. Inventories remain very lean, and many products still face significant downward price pressure. Most respondents said that while they still expect a pickup over the next twelve months, businesses are still very cautious, and a significant war or terrorist event likely would have very negative effects on sales.

Refiners report that sales are flat for gasoline, down for jet fuel and very strong for residual fuel oil that can substitute for natural gas. Inventories are at the bottom of the normal range for both gasoline and distillates, and there has been little progress in refilling storage despite high levels of production by refineries.

Demand for petrochemicals was very strong in April but has cooled for a number of products in May, including for ethylene, propylene, PVC, styrene, and MTBE. Contacts gave several reasons for the slowing demand, including a weaker housing market, weak demand from Asia, and buying ahead of the Iraq war that left excess inventory.

The service sector is showing scattered signs of improvement. Demand for temporary staffing has steadied, according to contacts, particularly for light industry along the Texas-Mexico border. Activity in Houston and Dallas remains fairly quiet. There is increasingly downward pressure on wages and salaries because firms say they are aware of having a larger labor supply.

Demand for legal services remained strong, especially for litigation and trial activity. Bankruptcy work, although still active, has slowed some, which contacts read as a positive sign for a recovery. Firms are also seeing some activity in transactional work, IPOs, and acquisitions. The accounting industry remained very active, with a recent increase in work for the energy industry. Wages and salaries are up 5 percent to 9 percent, and insurance costs are also skyrocketing, which is putting upward pressure on fees.

The outlook for trucking continues to improve, but higher liability insurance costs remain a concern. Rail shipments were higher than year-ago levels. Airlines report that traffic has steadily increased since the end of the war with Iraq, but expectations are for a summer with low fares and intense competition. Generally, demand has increased among leisure passengers while bookings for business travelers remain weak. SARS remains a concern. Airline capacity is still abundant, and airlines continue to seek productivity improvements to lower costs.

Hotel occupancy during the war was well below year-earlier rates, but bookings have picked up in recent weeks, partly making up for activity that was put on hold because of the war. Overall industry occupancy is still 4 percent to 5 percent below a year ago. Customers typically book rooms ninety days ahead of time, but that window has shrunk, with more people booking at the last minute.

Retail Sales
Retail sales remained soft, with most stores still reporting sales below a year ago. Although some retailers reported slight signs of improvement, others did not. Generally disappointed that sales haven't picked up more following resolution of the war, most contacts believe weak demand results from a lack of disposable income rather than consumer confidence. Stores are relying on promotions to improve traffic. With selling prices declining, retailers continue to look for ways to reduce their expense structures, including faster cash registers and increased use of part-time workers. Some retailers reported high inventory, particularly with apparel. Automobile sales have been flat, resulting in high inventories and downward pressure on prices.

Financial Services
Conditions are unchanged to slightly improved, but conditions have improved more slowly than most contacts would hope for. Competition is stiff. Deposit growth remains relatively strong. Loan demand has been mostly unchanged, although there has been an increase in demand for commercial loans. Mortgage lending, mostly for refinancing, remains the strongest category. Auto lending remains soft.

Construction and Real Estate
Construction activity continued to soften, and real estate markets remained weak. Commercial rents and occupancy rates continue to decline. The multifamily market is still facing weak leasing demand and too much new supply. New-home building continues to lose steam, and sales of existing homes are very weak. Contacts say that it will take new jobs and increased confidence to stimulate demand for new homes. Dallas-Fort Worth area home foreclosures spiked in May but dropped off in June.

The energy industry continues to strengthen, with growing optimism that demand for oil and gas services and energy-related manufacturing will continue to pick up. The U.S. rig count has pushed up to more than 1,000 working rigs, the first time it has seen that level since late 2001. Increases are natural gas-directed and still mostly conservative, low-risk projects. Contacts say that there is still substantial excess capacity until the domestic rig count reaches about 1,200 but seemed optimistic that 1,200 to 1,300 rigs would be working in the United States by the third quarter. International drilling has also increased moderately.

Dry conditions have hampered agricultural production. Demand for cotton is up on world markets, but competition is stiff. Cotton planting has been delayed because there is not enough soil moisture to germinate seed. There is also insufficient moisture to make forage. After planting was delayed because of overly wet conditions, corn production is now suffering from stunted growth because of dry conditions.

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Last update: June 11, 2003