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Federal Reserve Districts

Eleventh District--Dallas

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Eleventh District economic activity continued to show signs of improving in June and the first half of July, but growth remained slow. Contacts are becoming increasingly confident that the economy is expanding, but the speed of the recovery remains in doubt. Manufacturing activity was mixed, but demand for business services was expanding, albeit sluggishly. Retailers reported some pick up in demand in July, but say sales are only increasing marginally. There was little change in demand financial services or construction and real estate activity. Drilling for oil and natural gas moved to new highs in recent weeks, but the rate of increase has slowed substantially. Weather has hampered agricultural production.

Price pressures were mixed. Crude oil prices remained between $29 and $31 dollars per barrel for West Texas Intermediate since late May. U.S. crude oil inventories are still low; 11 percent below their 5-year average. Oil product prices followed crude oil prices throughout most of the period. A series of refinery outages on the Texas Gulf Coast and in California put upward pressure on wholesale gasoline prices in recent weeks. Gasoline prices are also under pressure from low inventories (roughly 5 percent below the 5-year average) and an expected strong summer driving season, as more vacationers elect to drive and not fly. Some manufacturers continued to report cost pressures related to high energy prices. For example, glass prices are up slightly. Food producers also report some upward pressure on prices, mostly due to higher input costs being passed along to consumers.

Other prices were falling. While still high, natural gas prices weakened throughout the period, as mild weather in the Midwest and North East allowed record levels of injections into storage. Storage levels remain 25 percent below last year and 15 percent below the 5-year average. Petrochemical prices have fallen with natural gas prices. Prices are lower for olefins, polyethylene, polypropylene, bottle resins, polyvinyl chloride and polystyrene. There were other reports of lower prices for manufactured products. For example, brick producers said prices were a bit softer. Apparel prices are lower and are expected to continue to decline. Prices have also fallen for paper products, despite rises in energy costs. There continues to be downward pressure on prices for primary metals, and contacts say inventories have gotten "a little big."

Several industries continue to report pressures from insurance costs, particularly in the service sector. The upward pressures appear to be subsiding for some types of insurance, but health insurance costs are still skyrocketing, and some firms say these rising costs are being passed on to employees.

Manufacturing activity remains mixed. High-tech firms reported increased sales and optimism, but energy-related manufacturing activity has declined since the last Beige Book. There have been some slight increases in demand for construction-related products, but sales remain below the levels of a year ago.

Respondents in high-tech manufacturing reported a significant increase in sales and orders since the last survey. Consumer products and personal computers drove the improvement, although communications equipment also picked up. One contact noted that firms are interviewing more job candidates in preparation for future hiring. Contacts report that inventories relative to sales remain lean. Most respondents reported that the recovery is likely to continue over the next six months. One respondent noted, however, that while orders have picked-up, contracts have been shorted from a year to about three-to-four months-indicating some uncertainty about the durability of recent gains.

Demand for stone, tile, brick and glass was flat to higher over the past six weeks but below the levels of a year ago. Demand for products used in new homes was mostly unchanged, but contacts said demand has been inconsistent making it difficult to predict a trend. Demand for primary metals products was flat over the past six weeks, which was considered lackluster by contacts because demand is usually up seasonally this time of year. Sales of paper products have been slow, down 3 to 4 percent compared to a year ago. Demand for apparel products continues to be weak, while sales of food products were mostly unchanged.

Sales of fabricated metal products picked up during the past six weeks but remained below the levels of a year ago. Demand was higher for aluminum cans and construction-related metal products, particularly due to a rise in retail and industrial construction. Lumber producers also reported an increase in demand over the last couple of months, but sales are below the level of a year ago and some contracts that are already on the books are being cut down in volume.

Refinery capacity utilization on the Gulf Coast fell from the very high levels of recent months, and outages in early July pulled utilization down further. Despite high levels of gasoline imports, there was little refill of inventory in recent weeks. Weak domestic and export demand, along with high costs, have led to reductions in petrochemical production levels. High natural gas prices have pushed up costs and led to production cuts for natural gas-intensive chemicals, such as methanol, ammonia, olefins and chlorine. The gas processing industry, which thrives on high oil and low natural gas prices, has also cut production with the situation reversed. The bellwether olefin plants on the Texas Gulf Coast (ethylene, propylene) are operating at minimal levels needed to justify keeping the furnaces on.

Demand for business services continues to expand, albeit sluggishly, but contacts were encouraged that the types of services demanded suggest a rebound in business activity. Legal firms reported that demand for litigation, bankruptcy and real estate work remained strong, and there is increasing demand on the corporate side, including financings and acquisitions. Contacts consider these to be optimistic signs of strengthening activity.

Accounting firms reported a slight slowing in demand over the last couple of months, which they attributed to extended deadlines under Sarbanes-Oxley. However, activity remains fairly solid across the board, particularly in audit and tax reform, and the transactional side is showing "glimmers of optimism." Transactional work is expected to slowly progress, but may open like a floodgate if the speculation about a pent-up need for investment is true. There have been a few significant increases in capital spending, mostly on upgrades in hardware and software. Demand is still very weak from the telecom industry, and one contact noted that their manufacturing clients are increasingly nervous over the rise in offshore competition. Contacts report a slowdown in receivables as more clients stretch out their payments.

Activity in temporary staffing picked-up somewhat in the second quarter compared to the first quarter, but contacts reported no significant rise in any particular sector. There continues to be little demand from large companies because most are still undergoing a lot of consolidation and restructuring. There have been more requests for proposals from the telecom, healthcare, government and education sectors, although contacts were cautious that firms may simply be looking for lower prices rather than planning to increase demand.

Airlines continued to report steady improvement, but respondents indicate that the current environment remains delicate. Capacity is down from earlier years, but airplanes are flying more passengers and revenue is rising. The trucking industry remains very competitive and there has been little change in activity or the outlook. Contacts in the rail industry report an increase in shipments compared to a year ago, particularly in the Western United States.

Retail Sales
Retailers reported mixed sales in June and a pick up in demand in July, but say sales have only increased marginally. Selling prices continue to be very competitive and falling, with some retailers reporting problems with excess inventory, particularly for women's apparel. Customers are still very price sensitive, according to contacts, and there is evidence that customers are facing problems with liquidity. One retailer noted an increase in credit card losses, particularly for long-lived accounts that had typically been very healthy. Auto sales continued to lag behind last year despite plenty of incentives from both manufacturers and dealers. Auto inventories are still high.

Financial Services
Loan demand has been mostly unchanged. Auto lending continues to soften, while mortgage activity remains stable at high levels to strong. Contacts suggest that there has been a surge in mortgage lending as customers anticipate rising mortgage interest rates and want to lock in low rates while it is still possible. One contact noted an increase in loan repayments because customers are refinancing mortgages to remove equity from the house to pay down debt. Commercial and industrial lending remained unchanged, but contacts report that their clients are seeing improvements in their balance sheets. At the same time, contacts report that problem loans are diminishing. Deposit growth remains relatively strong.

Construction and Real Estate
Overall construction and real estate activity was unchanged since the last Beige Book. Single family home building is still at moderate levels, although builders say they have little pricing power. Home sales continued to be strong for lower priced homes; one discount builder said June was his best month so far in 2003. Contacts expressed some concern about the recent upward movement in mortgage rates. Commercial real estate continued to "bump around the bottom," but contacts also noted a slight up tick in leasing activity. The increase was attributed to improved business sentiment, reduced reluctance to make decisions and the "great deals out there." Despite the bump up in leasing, contacts say they are a long way from working out excess inventory.

Drilling moved to new highs in recent weeks, but the rate of increase has slowed substantially. The dramatic slowing in activity has raised some concern that producers-unwilling to drill in earnest until every conceivable indicator was flashing green-are now pulling back some to see how the storage situation plays out for natural gas this summer. International activity (oil driven) remains solid, with Mexico and especially Venezuela adding to the rig count in recent months. Canadian drilling has finally picked up in a big way, apparently delayed by the pattern of thaws this year. Pricing of oil field services was described as typical of a tightening market, rather than a tight market, and still not that good.

Hail damaged cotton in the Texas Panhandle, and analysts expect a considerable reduction in yields. Tropical Storm Claudette brought heavy rainfall to the East Texas, Upper Coastal Bend and Rio Grande Valley regions of Texas, but conditions remain dry in other parts of the District. Harvest continues for some crops, but high production costs and moderate-to-low commodity prices remain a concern for producers. Demand for cattle remained good. Producers are carefully watching the Canadian market because a rapid re-opening of beef trade could result in increased supply and lower prices.

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Last update: July 30, 2003