Eleventh District economic activity continued to expand at a moderate pace
from mid-November to early January. While still mixed, manufacturing activity
strengthened some, particularly for chemicals and energy-related products. Service
sector activity was still strong, but there was some softening in demand for
temporary workers. Retail sales were mixed, while construction and real estate
activity picked up slightly. Energy activity continued to strengthen. Overall
lending and deposit activity continued to grow, and credit quality remains stable.
Agricultural conditions have been favorable.
Energy prices fell during the period but still remained relatively high in comparison
to 2002 and 2003. Crude oil prices are down since November, and crude inventories
moved above the five-year average in December, after being below the five-year
average all year. Heating oil and retail gasoline prices have also fallen. Inventories
of heating oil remained near the bottom of their five-year range, but inventories
of gasoline returned to normal. Natural gas inventories are more than 10 percent
above normal, and prices have fallen but remain very high compared to average
prices in 2002 and 2003.
Manufacturers continued to be concerned about input cost pressures. Several
industries said high energy prices have pushed selling prices up more than is
typical for this time of year. Declines in the value of the dollar have increased
the cost of some inputs, such as fabricated metals. Stiff competition is limiting
the ability to pass along cost increases. Rising prices for coke, coal, steel
and aluminum have led to slight increases in selling prices for some primary
metals. Higher input costs for paper products have pushed up selling prices
for toilet paper, tissues and paper towels, but stiff competition is putting
downward pressure on prices of corrugated boxes. China's demand for aluminum
has raised selling prices here, according to contacts. Rising cost pressures
are also a concern for contacts in the service sector. Some firms are able to
pass these cost increases onto their customers, but in other industries, contacts
say stiff competition limits their ability to raise selling prices.
Labor markets remain quite soft overall, but appear to be slowly improving.
Hiring continues to gradually strengthen in the service sector, with scattered
reports of difficulty finding qualified workers in some occupations. Some manufacturing
firms continued to report limited hiring or additional layoffs. Contacts in
the lumber industry, however, report plans to increase employment.
There were more signs of strengthening in the manufacturing sector from mid-November
to early January. Demand for construction-related manufactured products has
been stronger than usual for this time of year, partly because late fall rains
pushed construction work into December. Lumber sales remained at high levels
and producers of stone, clay and glass said demand was higher. Holiday demand
for food products was stronger than usual, according to contacts, who said this
was a very strong year for the food industry. District apparel manufacturers
report no change in demand. Producers of paper and paper products also reported
no change in demand over the past few weeks.
Sales growth increased slightly for semiconductor manufacturers. Producers
noted continued gains in productivity and little overall job growth. Inventories
were reported to be in good shape. Demand for consumer communications equipment
slowed slightly at the end of the year after very strong growth in the first
three quarters of 2004. Producers noted that demand for products, such as cell
phones and personal communication devices, was strongest from markets outside
the United States, such as from Asia and Europe. Demand picked up slightly for
industrial communications equipment, such as switches and power sources, and
growth is now about the same as a year ago. These firms say demand from businesses
has improved recently but consumer activity has been unchanged over the past
year. Further layoffs are anticipated as a result of investments in productivity-enhancing
Demand for primary and fabricated metals was unchanged from mid-November to
early January. Sales of primary metals continued to be slower than in the third
quarter--for some metals substantially slower. Contacts continued to cite lower
levels of consumer confidence and foreign trade competition as possible reasons
for slower activity, expressing concerns that China may become a net exporter
of steel. While overall employment has been unchanged, employees are working
Chemical producers continued to report strong increases in activity. Domestic
and international demand has been strong for chlorine, caustic soda, ethylene
and olefin products. Contacts say that record exports were stimulated by gains
in the price of oil relative to natural gas, as well as a drop in the value
of the dollar. Demand for polyvinyl chloride (PVC) also remained strong, although
rising ethylene prices have squeezed margins. A major new PVC and chlor-alkali
complex was announced on the Gulf Coast, the first major expansion announcement
since the late 1990s. Gulf Coast refiners have finally returned to high levels
of operation following hurricane-related downtime.
Temporary staffing activity softened slightly in the six weeks since our last
report. Demand from light industrial manufacturing remained strong while demand
for clerical workers slowed. Contacts said they are concerned about being unable
to raise fees to completely offset an increase in their state unemployment tax
rates. Demand for accounting services remained very strong. Activity was still
mostly to support requirements of the Sarbanes-Oxley legislation. Contacts say
firms are hoping to be more efficient complying with regulations this year because
they have experience with the new rules. Accounting companies are still hiring
"a lot of new people," and one contact said his firm had to turn away work for
a lack of professionals to staff the project. Demand for legal services has
been strong, driven by both transaction and litigation work. Hiring is up, and
fees for legal services are rising, but not dramatically. Costs are largely
unchanged, they say.
Railroads reported strong demand and rising prices. The trucking industry
reported steady demand. Contacts say profits are being squeezed by high fuel
prices and medical insurance costs because intense competition limits their
ability to pass on cost increases to selling prices. Demand for air travel was
up over a year ago, and airline industry contacts said planes have been flying
fuller. Still, excess capacity is putting downward pressure on prices, keeping
airlines focused on cutting costs to improve their balance sheet positions.
Further layoffs are expected at some carriers.
Retail sales reports were mixed. The Christmas season started slowly, but sales
growth picked up as the holiday approached and were strong in the days after.
Stiff competition and weak sales early on led to significant discounting at
some stores, but other contacts reported good margins. Only a few retailers
were left with excess inventory. Auto dealers reported sluggish sales and inventories
are higher than desired. Selling prices and profits are down.
Construction and Real Estate
Demand for housing picked up from mid-November to early January, following a
cooling that was reported in the last Beige Book. Realtors and home builders
expect a slightly slower year in 2005, and remain focused on the need for job
growth to stimulate activity. Multifamily contacts said Austin's market continues
on the road to recovery, but Houston and Dallas' apartment markets have been
overbuilt and may not see improvement until mid-2005. There is still a lot of
vacant commercial space, but contacts said office leasing continued to pick
up at a slow, steady pace.
Lending activity continues to increase, with the strongest loan growth in commercial
and industrial categories. Mortgage lending is showing serious signs of slowing,
according to contacts. Deposit growth was reported to be stable to good, and
credit quality was unchanged. There are concerns, however, that credit quality
could begin to suffer in a few quarters due to competitive rate pressures between
the large number of banks in the larger Texas cities.
Land drilling has been mostly unchanged, but there was a pick up in offshore
activity, with the number of rigs working in the Gulf of Mexico rising above
100 for the first time since a year ago. The increase is in oil-directed, deep-water
drilling, with little change in shallow waters. Rates have been rising for deepwater
rigs for several months, but long-term contracts have been limiting availability.
Some contacts expressed the view that the recent leveling of drilling in the
U.S. reflects a shortage of land rigs. Demand for oil services has increased
with drilling. Contacts expect capital expenditures by oil producers to increase
as much as 10 percent next year. Some contacts said such expansion plans might
be constrained by shortages of equipment and/or workers with needed skills and
that would lead to increases in the costs of these inputs rather than increased
Soil moisture is adequate, but late fall rains delayed cotton harvest in the
Plains, and cotton gins are expected to run through March, which is unusually
late. Ranchers have expressed concerns about plans to re-open live cattle trade