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Federal Reserve Districts

Eleventh District--Dallas

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Economic activity in the Eleventh District remained mostly steady at subdued levels in June and early July. Contacts in many industries noted some stabilization in demand, but few expected any real turnaround in the near-term. Outlooks remain very uncertain and businesses continue to cut costs and reduce payrolls. Price and wage pressures remain minimal.

Most firms continued to report downward price pressures. Fee reductions were noted in several industries, including temporary staffing, accounting and legal services and construction. Auto dealers said prices had firmed slightly, but remain low due to anemic demand and high inventories. Eleventh District-based airlines continued to reduce fares, although at a slower pace.

Manufacturers said selling prices were flat to down. Petrochemicals remained an exception, as some product prices were driven higher by the uptick in oil prices. Raw materials prices were mostly stable, but some contacts said higher fuel costs had squeezed margins. There were scattered reports of increases for some types of steel products among nonresidential construction contacts.

Prices for light sweet crude oil stayed near $70 per barrel throughout June, but fell back to $60 in early July. According to contacts the rise to $70 per barrel seemed to defy market fundamentals of weak demand and high inventories. Natural gas prices remained relatively weak, moving briefly over $4 per Mcf in June before falling back to $3.50 by early July. Natural gas prices are expected to remain low as inventories are 19 percent above the 5-year average. Pump prices for gasoline rose about 10 cents per gallon in June, but declined by 12 cents in early July.

Labor Market
Market Labor markets remain weak and the pool of available workers continues to grow due to rising unemployment and relocations from other areas of the country, according to contacts. Layoffs continue at some firms and many are continuing hiring freezes initiated earlier in the year. Staffing firms said employers were "dragging their feet" as economic uncertainty remains elevated. There were no reports of wage increases, and many firms were reducing costs by cutting perks such as bonuses and travel allowances, or freezing 401(k) contributions. Salary freezes remain widespread.

Construction-related manufacturers said demand was flat at weak levels, although there were some reports that public works construction had improved due to school bond measures and hospital expansions. Both private residential and commercial construction activity remain depressed, and contacts expect no improvement in the near term. There were scattered reports of layoffs, though most firms said they had already "right sized" their staff levels. Fabricated metals respondents said inventories had come down. Primary metals contacts anticipate some bankruptcies that may help alleviate excess capacity in the industry. Brick producers continued to cut capacity and reported some upcoming plant closures.

Most respondents in high-tech manufacturing said production had increased since our last report, primarily because retailers and manufacturers pared back inventories less sharply than they had earlier in the year. Demand was reported to be increasing in China, flat in Europe, and flat to slightly up in the U.S. One respondent noted that orders from state and local governments had been delayed due to budget shortfalls. Most contacts said that they continue to reduce employment but at a slower pace. Improved outlooks suggested more confidence that the economy will recover by year-end, and contacts are seeing some upside potential in their forecasts instead of just down-side risks.

Petrochemical producers said little had changed over the past six weeks. Export demand continued to increase due to the cost advantage of domestic natural gas-based products over oil-based products, but domestic demand remains generally weak and operating rates for most products are low. Prices for a variety of chemicals rose with the June uptick in oil prices.

Contacts in the paper industry said demand continued to stabilize with orders holding relatively steady. Employment levels edged down slightly, although most cutbacks occurred earlier in the year. Outlooks were slightly more optimistic than in the last report, although most contacts don't expect much change in demand through year-end. Food producers noted demand was off slightly but they remained optimistic about their individual business conditions. Most expect stable sales over the next several months. Demand in the transportation manufacturing sector remains weak overall. Outlooks suggest continued uncertainty, although several contacts said they believe economic conditions are stabilizing.

Refiners operated at a slightly higher percent of capacity utilization over the past six weeks, but most producers said conditions remained weak overall-gasoline demand remains slightly below year-earlier levels and both distillates and jet fuel are down 15 percent. Weak demand made it difficult for refineries to pass through the uptick in crude oil prices, thus profit margins remained low.

Retail Sales
Retail activity was mixed. Department stores saw continued improvement in sales, while value-based retailers reported slightly weaker activity. According to contacts, inventories have been pared down to appropriate levels relative to sales. Consumers remain cost conscious and continue to substitute less-expensive store brands for name brands. Merchants' outlooks for future sales remain cautious.

Auto dealers said demand was fairly steady at low levels, and most were hopeful the worst was behind them. Inventories remain high and are exerting downward pressure on prices. Outlooks continue to be pessimistic, with sales expected to remain low this year. Some are hoping for a turnaround by next spring, but most expect a long, slow recovery.

Staffing firms report that orders are trickling in and layoffs have slowed, but overall activity remains sluggish and erratic. Contract work continues to be more active than direct hires, and weakness is still widespread with only orders from the healthcare industry showing some stability.

Demand for legal services has stabilized at low levels according to contacts. Litigation and bankruptcy work is solid, while demand for real estate and corporate transactions remains soft. Law firms say that they have pushed out starting dates of new associates by several months and some are also offering lower starting salaries. Accounting services firms said demand for tax and audit services is holding up, while that for discretionary services has declined. Both legal and accounting firms expect business to be weak through year-end.

Airlines report that demand remains feeble especially for business travel. Capacity reductions and job cuts are underway and future bookings suggest continued weakness over the next three months. Transportation service contacts in small parcel shipping and intermodal trade noted an uptick in demand. Still volumes remain well below year-ago levels, and the outlook is for continued weakness in the near-term. Container trade fell further in June, but contacts expect a pickup in the fourth quarter. Railroads reported growth in June, although cargo volumes remain below year-earlier levels. Shipments of construction-related materials such as nonmetallic minerals, stone, clay and glass posted the largest monthly increases.

Construction and Real Estate
Home sales continue to improve in the lower-priced, entry-level market as buyers take advantage of the first-time homebuyer tax credit which expires at the end of November. Despite the pickup, overall sales are well below year-ago levels and contacts say sales continue to decline in higher-priced segments of the market. While sales prices are slightly below year-earlier levels they have held up comparatively well to most other areas of the country. Residential construction activity remains at very low levels, but some contacts expect to see a pickup in entry-level housing starts in the near term.

Commercial leasing activity continues to soften as businesses cut costs. Landlords are reportedly becoming more aggressive in lease negotiations by offering additional concessions. Vacancy rates are edging up for office and industrial space, but contacts say the retail market remains the most difficult. Still, supply and demand fundaments are better in the Eleventh District than in many other areas of the country, according to respondents.

Sales transactions of commercial real estate properties remain almost nonexistent, but there continue to be reports of interested investors for very good deals. Private nonresidential construction activity continues to decline, although there were reports of some pickup in public sector activity due to hospital and school projects. Several contacts noted stimulus money had not led to any additional work. Outlooks remain uncertain, and many expect no significant pickup in nonresidential activity until late 2010 or 2011.

Financial Services
Eleventh District loan demand did not change significantly over the past six weeks, according to financial industry contacts. Business lending was subdued and commercial real estate lending was anemic. Home loans remained at low levels and refinancing activity held steady. Contacts said credit standards remain tight and banks are being more conservative going forward due to uncertainty over future regulation. Contacts noted concern about commercial real estate loans and expect losses to become much worse as loans come due in the next several years. So far lenders have deferred the necessary de-leveraging as property values have declined, waiting to see where values settle before taking decisive action. Community banks saw strong deposit growth as customers moved funds from larger institutions to smaller ones as a safe haven, according to contacts. Although respondents say economic conditions have improved from earlier in the year, outlooks for the financial services sector remain very uncertain.

The number of working rigs in the Eleventh District rose slightly in late June and early July. The improvement was driven solely by rising oil prices--which hit $70 per barrel in June--as some producers switched to oil-directed activity. More recently oil prices slipped, and contacts expect projects to fall back. Natural gas activity continued to fall, and contacts were pessimistic about any near-term improvement. Despite the small improvement in the rig count, demand for oil services remained quite weak relative to the large overhang of capacity in the industry.

Drought continues to stress crops and forage across much of the District. Dry conditions are most severe in south and central Texas where many fields of cotton, corn and other dryland crops are not worth harvesting-leading producers to collect insurance. Ranchers in the driest parts of the District continue to liquidate their cow and cattle herds at a loss. Contacts expressed concern about the cash flow position of producers because of drought and high feed and input costs.

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Last update: July 29, 2009