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Federal Reserve Districts

Eleventh District--Dallas

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The pace of economic activity in the Eleventh District decelerated in September and early October. The economy is still digesting a reassessment of lending standards and slow down in homebuilding and residential real estate, but there continues to be little evidence that this is significantly affecting the broader District economy. The settling of financial markets has spurred some optimism among our business contacts. Retail sales improved. The service sector expanded at roughly the same moderately strong pace as the last Beige Book. Manufacturing activity decelerated. Energy activity and commercial construction are still robust. Consumer lending softened, but commercial lending is still expanding. Agricultural conditions improved.

There continued to be upward price pressures, particularly from food, energy and transportation. Declines in the value of the dollar and high shipping costs have made imported goods more expensive.

The price of West Texas Intermediate crude oil rose from near $70 per barrel in mid-August to over $80 per barrel in recent days. Diesel fuel prices moved over $3 per gallon, but retail gasoline prices have remained fairly steady. Natural gas prices have risen seasonally. Prices are higher for most chemicals. Most food product prices are up--some substantially--including those for wheat, corn, milk, cheese, shortening, flour and bread.

Many manufacturers reported high or rising input costs, and selling prices are up for some products, such as paper. Softer demand has restrained upward pressure on selling prices for most products used in residential construction. There is downward pressure on real estate prices.

Business service firms reported rising fees. Shipping costs are up, and airlines are raising fares. Retailers say declines in the value of the dollar are putting upward pressure on many products because most are imported or include imported components, but competitive pressures are restraining increases in selling prices. Auto dealers say real selling prices have fallen because manufacturers have added features to vehicles without raising prices.

Labor Market
The labor market remains tight, and wages are rising. Some contacts reported difficulty hiring and retaining entry level workers. Firms reported difficulty finding accountants, IT specialists, engineers, mechanics, welders and workers to supply the energy industry and commercial construction. A temporary service firm said they are running television advertisements to attract workers. There continued to be complaints that stricter immigration enforcement and increases in the minimum wage are pushing up wages.

Manufacturing activity decelerated. Sales of food products weakened considerably, which contacts attributed to higher food prices. Sales of corrugated boxes to retailers are up but decreased to manufacturers and firms involved in construction. Producers of recycled paper report steady activity. Transportation manufacturers report solid demand, particularly to supply specialized equipment to oil and gas firms.

Demand continues to soften for products related to residential construction, such as lumber, cement, tile and brick. Contacts with national sales say demand from Texas builders is stronger than from the rest of the country. Sales are still strong for products used for building luxury homes and commercial construction. Primary and fabricated metal producers say large commercial projects are keeping activity unchanged overall, despite slowing in homebuilding and smaller commercial projects.

Activity in the high-tech sector is mixed. Domestic demand for manufacturing equipment has slowed because some factory production is moving overseas. Growth in orders for semiconductors is stable to slightly up, buoyed by very strong growth in demand from Asia.

Refinery utilization held at rates over 90 percent, except for precautionary closures and power outages following a hurricane. Domestic demand for chemicals is weak, but exports remained strong.

Accounting, legal and temporary staffing firms reported little change in demand over the past six weeks. Demand remained particularly strong from the energy industry and continued to slow for real estate-related activity.

Overall shipping firms reported a slight increase in volume. Imports have decreased, but exports have increased considerably. Railroads say shipping activity is near capacity but slightly below a year ago. Shipping of products for housing construction continued to weaken. Transport of food and energy products grew but at a slower rate. Airlines continued to report steady traffic and solid bookings.

Retail Sales
Most retailers said sales picked up in September--after being weaker than expected in August--but are still below year ago levels. Sales were particularly good in Houston, and many national retailers said Texas growth was stronger than the nation. Consumers continued to feel the stress of high gasoline costs, according to contacts, and sales of discretionary items remained weak, with the exception of electronics. Despite a small seasonal slowdown, dealers reported increased stability in auto sales. Sales of used cars, parts and services have also held up fairly well over the past few weeks.

Construction and Real Estate
Housing demand and markets continued to soften, particularly for lower priced homes. Builders are curbing construction, and new home inventories are starting to decline. Softer demand has led to a recent increase in existing home inventories, however, causing contacts to push out their forecast for recovery of the housing sector to 2009. Home prices are unchanged, but builders are offering more incentives. Apartment demand picked up, and rental rates increased, causing contacts to be a bit more optimistic. Still, there is concern that competition from rental housing will increase when the peak of adjustable rate mortgage resets occur in 2008.

Office demand is positive, but the pace slowed. Commercial construction activity is robust due to projects underway and planned. Although rents are rising, they are expected to slow with slower absorption. Investment activity was still restrained. Contacts said larger deals are harder to finance and investors are re-evaluating risky deals. Industrial demand continued to rise at a steady pace.

Financial Services
Consumer lending softened noticeably over the past few weeks, but contacts said the slowing was less than expected and some slowing of mortgage and automobile lending was seasonal. Respondents blamed consumer weakness on increased uncertainty and problems with subprime mortgages. Lenders remain concerned that ripples from a slowing national economy will dampen activity, but calming of financial markets has spurred cautious optimism. Commercial lenders say credit quality is still good, pricing remains competitive and deposits are difficult to attract and retain. Commercial lenders are optimistic that growth will continue, and expressed some relief that prudent caution and rationality has returned to lending.

Energy activity is still robust, but the rig count remains flat. Some producers have expressed concern about the potential for low natural gas prices and have announced cuts in high-cost drilling. Others have expressed confidence and are moving forward. International drilling continues to grow and is cited as a major source of strength to oil service companies.

Warm weather repaired some rain damaged crops, and yields have improved to above average levels. Near record corn production is beginning to cause storage problems. Higher fuel, fertilizer, machinery and seed costs remain a concern. Cattle producers also report higher expenses. Demand for beef is strong, however, and prices are high. Range and pasture conditions are excellent.

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Last update: October 17, 2007