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Federal Reserve Districts


Eleventh District--Dallas

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Economic conditions in the Eleventh District remained weak from mid-April to late May, but there were increased reports of stabilization. Contacts in several industries said demand had improved slightly or had firmed since the last survey. Many characterized current conditions as bouncing along the bottom. While outlooks were slightly more optimistic than in past surveys, most contacts said they remain extremely cautious and do not expect any sustained improvement in the near term. Labor market conditions remain soft as firms continue to implement hiring freezes in the face of uncertainty.

Prices
Downward price pressures remain prevalent across industries. Staffing, legal and accounting firms continue to report pressure from clients to discount the price of their services. Retailers said selling prices were mostly steady, although prices of "day-to-day" goods continued to fall. Auto dealers said used car prices were holding up better than new car prices, and at least one contact expected domestic auto prices to drop further. Airline industry contacts noted substantial fare sales in recent weeks. Energy industry respondents said rates charged for routine wellhead work were under pressure as producers demanded concessions reflecting lower commodity prices and revenues.

Most manufacturers said selling prices were flat to down, and there were few reports of any expected increases in the near future. The exception was in the petrochemical industry where prices for some products had edged up with the increase in oil prices. Some manufacturers said input prices had stabilized recently, although there were several reports that construction-related input costs continued to fall.

Light sweet crude oil prices rose from $50 to $60 per barrel from mid-April to late May. U.S. inventories tracked downward in recent weeks, but remain about 15 percent above the 5-year high. Natural gas prices fell back below $4 per Mcf, and contacts expect prices to remain weak over the summer months. Pump prices for gasoline rose 38 cents per gallon during the survey period.

Labor Market
Layoffs continue at some firms, but most contacts said employment levels were steady after cuts earlier in the year. Consolidation in some industries--including primary metals, construction-related manufacturing, homebuilding, staffing services, financial services, and auto dealers--suggest overall employment levels may continue to move down. Hiring freezes remain prevalent. Wage pressures are mostly nonexistent, and many contacts were maintaining or initiating salary freezes or cutting hours and overtime in order to reduce costs.

Manufacturing
Eleventh District manufacturers report soft demand overall, but there were more signs of stabilization, with some contacts reporting a slight improvement in orders. Construction-related manufacturers said business remained weak. Some producers tied to residential construction said the pace of decline had eased and demand was bumping along the bottom. However, those tied to nonresidential construction reported sales continued to decline. Only minor cutbacks in employment were noted. Contacts said there was no impact yet on infrastructure activity arising from the stimulus bill. Primary metals producers said that while demand was still weak, sales had increased slightly--some said the uptick was due to an increase in consumer spending, while others said it was the result of industry consolidation. Outlooks among construction product and metal producers remain poor, but respondents were hopeful conditions were bottoming out.

High-tech manufacturing contacts reported orders had improved slightly since the last survey. Most respondents said the improvement came because business customers were no longer severely paring down inventories. Despite ongoing cautiousness about the outlook, contacts expect a gradual improvement over the next six months.

Paper-related demand was mixed. Contacts in the corrugated box industry said sales had picked up in the past 30 days and outlooks were more favorable. In contrast, orders for printing paper continued to fall as consumers continue to demand fewer printed materials, such as newspapers. Contacts were attempting to clear inventories and there were reports of employment cuts. Demand for food products held steady at current levels and contacts expect conditions to remain much the same in the coming months. Transportation manufacturing activity remains depressed by slow auto and aircraft orders, yet sales of some specialized products have picked up. In particular, a producer of industrial-use trailers noted consistent sales improvement over the past 45 days and is hiring back half of the workers laid off last year.

Many petrochemical products are over-supplied given current weak economic conditions. There were reports of plant shutdowns, although some existing plants had come back on line after hurricane and maintenance problems. Most contacts said orders were weak, although export demand was stronger for ethylene and polypropylene producers as higher oil prices and lower natural gas prices make these domestic gas-based products a bargain.

Refining capacity utilization rates stayed in the 82 to 84 percent range during the survey period and remain about 7 percentage points below a year ago. Respondents said demand for gasoline is down 2.6 percent from a year ago, and demand for distillates is down more than 15 percent as poor economic conditions reduce consumption of diesel fuel. Refinery margins remained relatively weak as oil product prices rose by about the same amount as crude oil prices.

Retail Sales
Retailers noted some improvement in sales activity over the past six weeks, and contacts indicated that Texas continues to fare slightly better than the national average. While activity remains below year ago levels, there has been a trend toward stabilization since the beginning of the year. Contacts were seeing customers return, although they remain very cost conscious and continue to substitute less-expensive store brands for name brands. Outlooks remain quite uncertain and most respondents don't expect any solid improvement until 2010.

Auto dealers said sales continued to hold steady at low levels. Several contacts said the industry has likely hit bottom and will be "scraping along" for some time. Overall, respondents' outlooks remained grim for the rest of the year, although some were encouraged by recent gains in consumer confidence.

Services
Staffing firms report a leveling off in activity as layoffs have slowed. While direct hires remain few and far between, demand for contract and temp employees has improved slightly, and the increase is broad based across industries. While outlooks were somewhat more optimistic than the last survey, respondents warned that an upturn is not expected in the near term, and "we are not done with surprises yet."

Demand for legal services remains soft, especially for corporate and transaction-related services and real estate-related services. Contacts report they are seeing more business deals fall apart, which has started to lead to a pickup in bankruptcy and litigation. Still, the increase is expected to be less than in previous recessions, as more companies appear to be working disputes out themselves in order to avoid legal costs. Several firms reported layoffs, and some had cancelled or scaled back their summer internship programs. Accounting contacts said demand was steady. A seasonal slowdown is expected now that tax season is over.

Eleventh District-based airlines reported weak conditions as concerns about the H1N1 virus dampened already low international and business travel. Low demand has prompted deep fare sales in recent weeks. Despite steady to slight increases in future bookings, airline industry outlooks remain negative for the year. Transportation service contacts in cargo and container trade reported a recent pickup in demand and were hopeful this was a sign that the economy was bottoming out. Still volumes remain well below year-ago levels. Intermodal cargo volumes rose slightly over the past month as export demand improved, and contacts said water-based container trade volume increased. Railroad respondents said volumes declined across the board following a pickup noted in the last survey. The railroad industry outlook remained grim for 2009, but contacts said it looked like the economy was bouncing along the bottom.

Construction and Real Estate
Homebuilders reported a slight uptick in sales. Much of the demand is focused on the lower-priced entry-level market, and one large company said the first-time homebuyer tax credit was responsible for about 80 percent of their current business. There was some concern about the November expiration of the program, however, as buyers have just begun to come off the sidelines. Despite the recent increase in sales, activity remains well below year ago levels and demand in the higher-priced segments of the market remains soft. Home starts remain at very low levels, but outlooks suggest a pickup as inventories have been greatly reduced.

Commercial leasing activity continues to soften, although contacts say conditions in Texas markets remain much better than elsewhere in the country. Sales transactions for commercial real estate properties are almost nonexistent, but contacts say the number of investors waiting in the wings continues to grow, which should lead to more sales by year-end. According to respondents, the re-pricing of properties will be painful but necessary. While some contacts expressed growing concern about the renegotiation of maturing commercial real estate loans, there were reports that credit markets are "beginning to thaw" and that real estate lenders are becoming more interested in making loans on very good deals.

Financial Services
Eleventh District financial services contacts remain very cautious about current conditions. Real estate lending remains scarce. One contact characterized the current situation as a "standoff" with lenders and borrowers waiting to see who can hold out the longest to get the best deal once things have stabilized. Maturing commercial real estate loans were being renewed at a lower leverage and size, if at all. Contacts report a slowdown in consumer loan demand, specifically credit card purchase volume. At the same time, overall credit quality in the region continues to deteriorate. Contacts say they are maintaining tight credit standards. All contacts expected a tough year, but some said conditions were somewhat more stable now than earlier this year.

Energy
Demand for oil services and machinery fell as drilling activity continued to plunge, according to respondents. The number of working rigs in Texas fell by about 15 percent over the past six weeks. The Louisiana and New Mexico rig counts stabilized during the survey period but are down 62 and 27 percent, respectively, from the summer 2008 peak. Contacts in the natural gas industry noted productive shales in Texas, Oklahoma, Arkansas and Pennsylvania and increased efficiency due to new technology may mean a reduced need for operating rigs going forward.

Agriculture
Strong spring rains improved planting and pasture conditions in the north and eastern parts of the District, but dry conditions continue to hamper agricultural production in other areas, particularly Southwest Texas. Drought conditions have increased producers' need for financing. While there were reports of some improvement in livestock conditions in areas that received rain, forages were practically non-existent and producers continued to provide heavy supplemental nutrition to livestock in Southwest Texas. No impact of the H1N1 flu on Texas agriculture was reported.

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