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Federal Reserve Districts

Eleventh District--Dallas

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The pace of economic activity in the Eleventh District decelerated further from mid-October to mid-November. Manufacturing activity continued to weaken, and demand for business services was softer. Retail sales were weaker than expected. Financial service firms reported slower consumer and commercial lending. Home real estate markets and construction continued to soften, but commercial and multi-family building and markets remained strong. Energy activity picked up. Agricultural conditions remained generally positive.

The level of uncertainty remains quite high, and some firms say it has increased over the past month. Most industries expect activity to pick up in 2008, but the expected timing of the rebound varies from firm to firm.

Energy prices have risen steadily since early October. Escalating geopolitical tensions, tight fundamentals and a weak dollar caused sharp increases in the price of crude oil that pushed up heating oil, gasoline and diesel prices. Natural gas prices also rose but were restrained by high inventories, which reached record levels.

Higher energy costs are putting upward pressure on selling prices for most industries, but competitive pressures continue to restrain price increases for many firms. Shipping firms say rising fuel costs have pushed up prices, and some expect further price increases in January. Airline fares are also higher.

Manufacturers continued to report cost pressures from higher fuel, raw materials and import price pressure from declines in the value of the dollar. Price pressures continue to be a serious concern for the food industry. Costs are high or rising for many products, which contacts attribute mostly to increased demand for corn to make ethanol. Prices have recently risen sharply for wheat and flour, in part because production was displaced for corn.

Labor Market
The labor market remained tight, and difficulty in hiring continued to restrain some activity. Still, the market has loosened a little, with some firms reporting slower hiring, and at least one manufacturer scheduling workers for shorter shifts. Temporary service firms are having less difficulty finding potential employees. While there continues to be some wage increases, pressure appears to have ebbed, and a few firms said they are considering bonuses instead of salary increases this year.

Strong commercial, multifamily and industrial construction continued to fuel demand for some construction-related products, but sales declined further for products used in residential building. Manufacturers of construction-related products are cautious, expecting housing markets to remain slow through 2008 and possible declines in commercial and road work.

Some high-tech manufacturers reported continued good sales, but other said sales were slower, leading them to reduce their outlook for activity. Demand for food products is stable, although producers say there has been some shifting of consumption to lower-priced foods. Paper producers say demand for recycled paper is very high, but a noticeable drop in sales of corrugated boxes to manufacturing and construction has caused inventories to rise. Transportation manufacturers report stable demand. Auto producers say inventories are a little high.

Domestic petrochemical demand was still weak, with slow sales to homebuilders and auto producers. A weak dollar and favorable feedstock prices are still spurring strong export demand, but higher feedstock costs have driven up prices for some chemicals, hurting sales. Refiners were reluctant to build crude inventories with current prices well above futures.

Retail Sales
Retail sales have been weaker than expected and slower than in the last reporting period. Contacts say consumers are being very cautious, with high food and fuel costs straining lower-income customers. Warm weather dampened some apparel sales, but national retailers said Texas continued to outperform the rest of the country. Many stores entered the holiday season with discounts to reduce inventory. Some contacts report input cost pressure building over the next several months, leading to a greater sense of urgency to streamline operations and reduce costs. Auto sales remain sluggish.

Demand for temporary staffing services was sluggish. Orders have declined from manufacturing and warehousing industries, but demand is holding up for accountants, financial services, information technology professionals and business support staff.

There has been little change in demand for accounting and legal firms. Accounting firms reported steady demand and a very good outlook. Law firms report a pickup in bankruptcy and litigation work that is sufficient to offset slower real estate and corporate transactions. Contacts say the recent shift in legal activity usually signals a slowing economy.

Overall shipping activity has been weaker. Intermodal firms say imports have fallen and are not being completely offset by export growth. Small parcel volume has been decelerating over the past two months, but large freight volume appears to have increased. Railroad volume is still strong but weaker than a year ago, with particularly weak shipments of motor vehicles, lumber and wood.

Airlines reported strong demand and no sign of weakness in bookings. Capacity is flat to shrinking. Contacts are very concerned about rising fuel costs and the possibility that a slowing economy might affect business travel, but said they are hoping for a soft landing.

Construction and Real Estate
Home markets weakened, and construction continued to ebb. Sales have dropped significantly for homes priced under $200,000. Existing home inventories edged up but are low compared to historical and U.S. averages. Overall existing home prices remained steady, but there is downward pressure on new home prices, and builders are increasing incentives to reduce inventory. Contacts are uncertain about the outlook, but most don't expect a turnaround until 2009. Apartment demand picked up, partially because some homebuyers are unable to qualify for a mortgage. Multifamily construction is still robust, and contacts are optimistic that employment and population growth will keep demand growing enough to absorb new supply.

Office leasing continued to expand, although growth is still slowing from last year's pace. Office rents have risen strongly in most metropolitan areas, but some contacts are uncertain they will hold up because of new construction and the deceleration in demand for space. Office fundamentals remain quite good, according to contacts, but investment activity is still being hampered by difficulties obtaining credit. A few contacts say commercial credit availability deteriorated in November after improving in September and October.

Financial Services
Demand for loans is slowing along with the economy. Financial service firms expect continued softening, but remain optimistic. Potential borrowers are receiving added scrutiny, and credit spreads have been increased for the more highly leveraged deals. Still, competition for quality deals remains aggressive.

Consumer lending has softened, particularly for automobiles. There has been a slight shift toward credit card lending and away from home equity lending. Real estate lending for the most creditworthy borrowers has increased as mortgage rates have chased the 10-year Treasury rate down. Commercial lenders say some of the recent slowing in lending may be seasonal, but most of their clients have revised down their outlook and anticipate further softening in the economy.

Energy activity remains robust. Rising energy prices stimulated an increase in land drilling--with Texas drilling rising to the highest levels since the 1980s, and international activity continuing to rise. Demand for oilfield services was strong. Lead times remain fairly long for many manufactured items used in the oil patch. Competition from newly built and imported rigs has put downward pressure on rates.

Warm, dry weather boosted cotton yields, but production is below average because producers shifted acres to corn, and cotton prices have increased to well above the 10 year average. Yields for corn, cotton and grain sorghum are good to excellent. Winter wheat and pasture growth has slowed. Livestock producers have begun supplemental feeding of their herds.

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Last update: November 28, 2007