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Federal Reserve Districts

Eleventh District--Dallas

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Eleventh District economic activity accelerated from mid-November to early January. Energy activity continued to strengthen, although the industry is still cleaning up after the hurricanes. Manufacturing picked up, and demand for business services increased slightly. Construction remained at about the same pace, while most real estate markets improved gradually. Contacts in the financial services industry say credit quality remains good. Dry weather is straining agricultural conditions, but the 2005 cotton crop was one of the largest ever.

Contacts in many industries expressed concerns about high or rising costs. Increased costs led to higher selling prices at some firms, but many said that stiff competition was limiting their ability to increase prices. Input costs are up for a number of products, including energy, fuel, health insurance, shipping, lumber, paper, metals and property insurance. Prices are up for most construction-related materials. Home builders report higher costs for steel, concrete, copper, roofing and framing, and say that home prices are not rising as fast as they'd like. Agricultural producers expressed concern about high fuel, fertilizer and chemical costs.

Energy prices remain high by historical standards. Cold weather in the northern United States led to gains in heating oil and natural gas prices in December. Reduced consumption and warmer weather pushed natural gas prices down sharply in January. Natural gas and crude oil inventories are high. After falling steadily through mid-December, retail gasoline prices were pushed up at the end of December by rising crude prices and fears that MTBE regulation could reduce supply.

Prices are lower for most petrochemical products, including styrene, polystyrene, polypropylene, bottle resins, benzene, and ethylene glycol. Contract ethylene prices have held up, but spot prices are down significantly.

Labor Market
The labor market continues to slowly tighten, with more reports of hiring and rising wages. Workers with specialized skills remain in short supply, such as to supply the energy industry, trucking and some areas of manufacturing and information technology. Temporary service firms say a very high percentage of workers are obtaining full time positions from initial short term contracts.

Manufacturing activity strengthened. Unusually warm, dry weather led to very strong demand for construction-related products, such as brick and stone. Demand is up for fabricated metals compared to last quarter and last year. Primary metals producers reported strong demand, stimulated by home building and exports, and some said inventories were low. Food producers reported little change in sales. Demand for paper and lumber was also unchanged. Lumber producers say inventories are up.

High-tech manufacturers reported steady to slightly higher growth in orders and sales since the last survey. Semiconductor orders accelerated some, according to contacts, who say the outlook has improved. Semiconductor inventories are lean, and replenishing of inventories over the next several quarters is expected. Communications equipment manufacturers reported steady growth in orders.

Petrochemical demand and prices weakened from very strong levels. Downstream processors did not want to build inventory because they sense price reductions ahead, while producers held back on building inventories for year-end tax purposes. Significant levels of imports have been entering the country for polyethylene, bottle resins and other plastics. Contacts expect imports to continue as a hedge against hurricane-like disruptions.

Refinery margins, which were unusually high, began a sharp and consistent decline in early October that continued through November. Margins stabilized at relatively high levels in December. Gulf Coast capacity utilization rose from 78 to 85 percent in recent weeks. Two refineries are still out of operation due to hurricane damage and three others are operating on at a reduced level. Suppliers to the industry say most refineries are operating again but continue to struggle to stay up and to run at full capacity.

The service sector appears to have accelerated slightly. Accounting firms still report very strong activity, and demand has increased for firms that supply temporary workers. Temporary agencies say new business is mostly to supply firms that manufacture durables, which they attribute to business attracted by the low cost of doing business. Demand at legal firms has been mostly unchanged, with the strongest activity related to transactions, taxation, and real estate. Contacts say work to support transactions in the oil and gas sector has been especially profitable and strong.

Transportation firms reported continued strong demand. Cargo volume is up slightly over the past month, with growth mostly from international demand. Trucking firms say sales to the private sector are up. Wage and fuel costs have risen faster than shipping rates, they say, particularly for contracts with state and federal government where some rates were set three or four years ago.

Railroads report higher demand, with more shipments of coke, motor vehicles, crushed stone and ethanol. Contacts say shipments are lower for chemicals and grain, which they attribute to continued hurricane disruptions. There have also been fewer shipments of wood and metallic ores. The industry is working near capacity, and there are plans to add rail lines and purchase locomotives this year. Airlines report that demand has increased and is growing faster than capacity domestically. This has allowed carriers to increase prices and profits.

Retail Sales
Retail sales have been reported as "good" but not "great." Sales continued to be strong in areas that have become home for hurricane evacuees. Contacts say that price competition is fierce, cutting into profits. A few retailers reported pockets of high inventory, but most said inventories are at good levels, although some retailers discounted to clear the merchandise. Contacts have now turned their focus to gift cards, which they hope will be used to purchase goods at full price leading to greater profit margins. Retailers expressed concern that new rules requiring higher minimum credit card payments will restrain spending by already strapped consumers. Auto dealers report that sales have improved some from a sluggish level.

Construction and Real Estate
Office markets continue to gradually improve. Vacancies are edging down, and there are reports that concessions are being reduced or eliminated. Commercial construction continued to rise. Industrial demand and construction was unchanged. New home demand is still strong, according to builders, who said prices have not risen as much as they would like despite increases in raw material costs. Demand for existing homes was still strong, with sales up over last year's record levels in most major metros. Demand for apartments grew steadily over the past six weeks.

Financial Services
Financial services respondents continued to report good credit quality and intense competition in pricing loans. Deposit growth is pretty strong, they say, but there is increased pressure to raise interest rates on deposits.

Energy activity has been strong. The domestic rig count was unchanged, but this was largely due to capacity constraints. There are still shortages of labor, equipment and materials, such as sand for fracturing and cement. Oil service firms report extremely strong demand and long backlogs. Equipment manufacturers are encouraging customers to order early and carry large inventories.

Day rates for rigs in the Gulf of Mexico are up sharply, partly because of hurricane-related losses but also because some rigs are leaving the Gulf for more lucrative markets overseas. The rig count is rising outside the U.S., and contacts say that service demand has been increasing rapidly because this drilling is complex and expensive.

Repairs are still bringing production back on line following the hurricanes. Twenty six percent of oil production in the Gulf of Mexico was off line on December 22, down from 46 percent on November 15. Nineteen percent of natural gas production was out of service on December 22, down from 37 percent on November 15. The recovery is expected to slow over the next several months, because several large outages will take months more to repair.

Conditions are very dry and subsoil moisture is low in parts of the District. Poor water supplies and pasture conditions have led some ranchers to reduce herds. Many ranchers are purchasing feed grains for their livestock because corn production was down 7 to 10 percent from the prior year. The Texas 2005 cotton crop was large, thanks to spring rains, hot weather and eradication of the boll weevil. Citrus producers benefited from high selling prices following wide spread hurricane damage to the crop in Florida. Ranchers are pleased that Japan lifted its ban on U.S. beef imports, although they expect a delay before producers regain market share. Japan had been the leading importer of U.S. beef.

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Last update: January 18, 2006