The Federal Reserve Board eagle logo links to home page

Beige Book logo links to Beige Book home page for year currently displayed July 25, 2007

Federal Reserve Districts

Eleventh District--Dallas

Skip to content

New York
St. Louis
Kansas City
San Francisco

Full report

The pace of economic activity in the Eleventh District was moderately strong but decelerated slightly in June and early July. Unusually wet weather dampened activity in several sectors. Most contacts remain cautiously optimistic that overall economic growth, while slower than a year ago, will not deteriorate further. Manufacturing activity cooled, but there was a slight rebound in the service sector. Energy activity remained high but with little growth. Residential construction and real estate continued to soften, but nonresidential activity is still robust. There was little change in the financial services sector. Agricultural conditions continue to be mostly favorable.

Input cost pressures are straining most industries, and competition is making it difficult to pass these higher costs to selling prices in many instances. Energy costs remain high, and many companies say that freight, rail and trucking rates continued to escalate. Increased demand for corn to produce ethanol has resulted in higher prices for all types of food, including meat, flour, shortening and dairy products.

International tensions pushed up crude oil prices to the highest level in 10 months. While strong, demand was restrained by low rates of refinery utilization that caused crude inventories to swell above 5-year averages. Wholesale gasoline prices fell after the Memorial Day holiday, but picked up with rising crude prices and the July 4 holiday. Gasoline inventories are well under five-year averages. Weak demand and high inventories pushed down prices for natural gas to near $6.50 per million Btu in early July. Natural gas inventories are 18-20 percent above the 5-year average. Prices increased for some petrochemicals.

Overall home prices have held steady, but incentives on new homes are prevalent and contacts expect a price correction for entry level homes. There is also downward pressure on prices for many materials used in home construction. Office rents continue to rise, but contacts expect rental increases to ease as new supply keeps vacancies steady. Prices are up for some products used in nonresidential construction. Producers of ready mix report that they had no problems raising prices, but cement manufacturers say they may need to back down from a recent price increase.

Labor Market
The labor market remains tight. Most firms report wage increases between 3 and 4 percent, but wage pressure is stronger in Houston and for workers with skills in high demand. For example, there continues to be a shortage of accountants, and salaries are expected to increase between 5-8 percent this year. Some manufacturers have reduced production and employment but others are hesitant to let go of skilled workers. Homebuilders continue to lay off workers, but the labor market remains very tight for commercial construction.

Softer demand for construction-related products caused many producers to revise down their outlook for the year. Sales to homebuilders continued to slow, and some commercial projects have been delayed because high construction costs have caused budgetary concerns. Extremely wet weather has disrupted building in the District, but contacts note that construction activity continues to be better here than in the nation. Inventory levels have increased for most products, and production has been cut back. Manufacturers of stone, clay and glass reported sales down 5 to 12 percent over the past six weeks. Fabricated metals producers say activity has been flat, but sales of primary metals have softened substantially for some firms. Lumber producers report demand is flat or up but say sales are below a year ago.

Sales of corrugated boxes have been stable, with high demand to supply the maquiladora industry along the Mexican border. Overall activity is below a year ago, which paper producers attribute to manufacturing production moving out of the United States. Food production has been in line with the typical seasonal pattern.

Demand for transportation manufacturing continued to be strong, particularly to supply the chemicals and defense sectors. Contacts are optimistic about sales growth, although they expect a precipitous drop in defense-related work in 6-12 months. Sales of high-tech products were up slightly. Demand for new semiconductor machinery and equipment has begun to soften, however. This is partly the result of changes in production technologies, but contacts also noted reduction of semiconductor capacity in the District. Inventories are mostly at desired levels.

Although rising, refinery utilization remains below normal; held down by high levels of planned maintenance, a large number of unplanned outages, and continuing shortages of labor and skills to deal with the maintenance problems. Refiner profits remained high. International demand for petrochemicals continues to be strong, and domestic demand is slowly improving.

Demand for business services was very similar to the last report, but transportation activity picked up. There continues to be strong demand for accounting services, with brisk demand directly and indirectly from the energy industry. Temporary staffing firms say demand was unchanged, with continued strong orders for workers with accounting, financial and IT skills. Orders were mostly to fill existing positions, with few new positions being added. Demand for legal services was also unchanged--at or slightly above the level of a year ago. Transactional and corporate real estate activity was still very strong, but bankruptcy and litigation work remained slower than a year ago.

Trucking activity improved but remained slightly under last year. Rail cargo volume is very high but weakened slightly, which railroads attribute to weather disruptions. Rail shipments of grain and construction materials declined, but volumes increased for petroleum products, chemicals and metallic ores. Small parcel shipping firms said cargo volume continued to be good, and noted the outlook improved. Container trade activity decreased slightly but remained well above a year ago.

Demand for air travel has been strong, and airplanes are flying fuller than ever. Contacts say traffic was stimulated by low fares. Airlines are now raising fares and, so far, there is no sign that bookings are dropping off. An unusual pattern of storms caused higher than normal cancellations and longer than usual delays because full flights left less flexibility to manage displaced passengers. Contacts in other industries have complained that flight delays have reduced productivity.

Retail Sales
Most retailers reported weaker than expected sales. Consumer spending continues to be affected by high gasoline costs, according to contacts who say that customers are seeking value. Abnormally wet weather also affected sales in recent weeks. Still, firms selling to the national market report better sales in the Eleventh District than in most other parts of the country. Auto dealers say flat demand and plentiful inventory led to an increase in discounts and incentives.

Construction and Real Estate
Real estate contacts have revised down their outlook for both homes and apartments. Homes sales are below a year ago, and starts have slowed sharply. Rain may have affected sales, but contacts attribute the weakness mostly to tighter lending standards for lower income borrowers, less investor activity and a wait-and-see attitude among homebuyers. Most of the downturn has been for lower priced homes, but Dallas contacts report higher-priced markets also being affected. New home inventories dipped slightly but remain high. Apartment demand has been weaker than expected, except in Austin where demand and rents continued to rise. In some Dallas/Fort Worth suburbs, houses rent for less than apartments.

Office demand picked up from the lackluster pace recorded earlier this year. Absorption is below last year, but contacts say leasing demand is healthy. Office construction is robust in Dallas and continues to pick up in Houston and Austin. Out-of-state investors are boosting demand for industrial space, but new construction is keeping vacancies relatively unchanged.

Financial Services
Consumer lending remained somewhat softer than earlier this year. Contacts still report solid growth in commercial lending, and pricing on loans is very competitive. Banks and credit unions report no deterioration in credit quality. Deposits are still difficult to obtain.

Domestic drilling remained at high levels, but there was little growth. With 85 percent of domestic activity geared to natural gas, bearish inventories and lackluster pricing provide limited incentives to expand drilling. Many rigs have been moved from the Gulf of Mexico to earn better rates and avoid the hurricane season. The supply of rigs, drill pipe and equipment has caught up with domestic demand, slowing new orders and easing price pressure. New orders and margins are much better for international work, which has remained strong despite slowing in Canada.

Widespread rain and cooler than normal temperatures improved livestock conditions and boosted range and pasture growth. Most crops are off to a good start and yields look promising, especially for wheat, corn and grain sorghum. Rain slowed cotton development in West Texas and delayed wheat and hay harvesting. Increased demand for ethanol has shifted relative crop prices and changed production from last year. Planted acreage for corn is up 19 percent, grain sorghum is up 45 percent and cotton is down 22 percent.

Return to topReturn to top

Previous Kansas City San Francisco Next

Home | Monetary Policy | 2007 calendar
Accessibility | Contact Us
Last update: July 25, 2007