The Federal Reserve Board eagle logo links to home page

Beige Book logo links to Beige Book home page for year currently displayed October 24, 2001

Federal Reserve Districts

Eleventh District - Dallas

Skip to content

New York
St. Louis
Kansas City
San Francisco

Full report

Eleventh District economic activity weakened further in late September and early October. Many service businesses reported a severe drop in demand following the week of September 11th, and activity has not returned to the level of early September. Retail sales also weakened. Manufacturing activity has accelerated its decline, and the energy industry has weakened considerably. Construction and real estate activity fell. Financial service firms reported weaker loan demand. Agricultural conditions continued to worsen.

Prices and Labor Markets
Price declines were widely reported. Oil prices fell $5 per barrel since the last Beige Book, and inventories of crude and products have risen sharply. Many contacts reported a drop in selling prices, and some anticipate further price declines. Raw material costs are also declining, although in many cases not as fast as selling prices. Fuel surcharges have been eliminated. Insurance costs have increased sharply for some firms.

The labor market has softened dramatically. Many layoffs have occurred, particularly at firms in the travel and tourism industries. Several service and manufacturing industries are contemplating layoffs or additional layoffs. Contacts reported that it is significantly easier to hire than at this time last year. While wage pressures have subsided, health insurance costs have more than doubled for some firms.

Manufacturing activity accelerated its decline in September and early October. Several industries reported a reduction in their sales and outlook following September 11, including high technology, glass, apparel and fabricated metals. Producers supplying the automobile industry reported a sharp drop in sales. Downstream energy-related manufacturing has benefited from lower oil and natural gas prices, but weak demand and overcapacity dampen the outlook for these industries. Construction-related manufacturing continues to slow.

Some construction-related manufacturers, particularly those supplying home building and highway construction, reported little change in activity, although some have revised down their outlook. Contacts in the cement industry say they are continuing to work off backlogs of demand. Cement producers do not expect to see any affects from the September 11th attacks until next year, if at all. Brick manufacturers reported continued slowing of demand, as single-family home construction decelerates. The lumber industry reported a slight decrease in demand, although contacts have become more pessimistic about their outlook.

Demand for fabricated metals was slowing prior to September 11 and is slowing faster now. One contact said conditions are "as tough as I've seen them in 10 years." Selling prices have fallen dramatically, according to contacts who say that structural steel is selling at prices of 20 years ago. Raw materials prices have also declined, but margins are very thin. Primary metals producers say activity has slowed since earlier in the year, but they have yet to feel any effects of the September 11th attack.

Glass producers reported drastic declines in demand since the last Beige Book. Sales of glass for commercial purposes are down as much as 40 percent, while sales for residential building fell 15 percent. Sales of glass used for automobiles also declined, as some car plants scaled back production. Inventories of glass are high, prices are falling, and production is being reduced.

Apparel demand has also softened since September 11. Orders of apparel have been cancelled and inventory has been returned, causing inventories to build. Demand for food products picked up briefly after September 11th because consumers were stocking up on some products. However, demand has now returned to early September levels. Inventories of frozen strawberries and some vegetables are low because of weather-related production problems in Mexico.

High-tech manufacturing activity weakened after September 11, and many contacts said their business customers have put orders on hold. Contacts reported in the last Beige Book that they were optimistic the industry was bottoming out. That optimism has dissipated, and most contacts expect a slightly steeper downturn with the recovery pushed forward from the end of this year to the first or second quarter of 2002. All high tech respondents reported that they have been successful in maintaining lean inventories, with the exception of the telecommunications industry. Telecommunications firms continue to report weak and falling demand. Layoffs continue, and contacts say that companies are in need of cash. A rebound is not expected until the third quarter of 2002, at the earliest.

Responses from paper and packaging producers varied depending on the industries they sell to. Some producers reported a slight increase in demand while others, such as one selling to the auto industry, reported a severe drop. A company that sells packaging for exports also reported a drop in demand. Demand for printing has fallen sharply, according to contacts, who say this is the worst printing market in the last 20 years.

Petrochemical contacts say falling natural gas prices have led to a pick up in export demand because the competitive position of domestic producers relative to the rest of the world has improved. The industry continues to suffer from severe overcapacity, however, and chemical prices fell along with feedstock prices.

Demand for refiners on the Gulf Coast has been helped by problems following a fire at a Chicago refinery. Refiners reported improved margins because the price of product has fallen more slowly than the price of crude oil. Gulf Coast refineries continue to produce at high levels. They are just entering the turnaround season, shutting plants for maintenance and switching from gasoline to heating oil production. Jet fuel is easily converted to heating oil, and contacts expect much of the reduced demand for jet fuel to be used to build heating oil stocks. Fears of shortages of heating oil this winter have quickly abated, and inventories are already 7 percent higher than last year.

Service sector activity was mixed in September and early October with some industries reporting a slight softening of activity while others reported sharp declines. There was a sharp drop in demand for hotels, car rentals, tourism, airlines and airline-related firms after September 11th, which has led to a large number of layoffs. Transportation firms reported that passenger and cargo volume is down. Airline demand is currently down roughly 30 percent from pre-September 11th levels. Airline revenues are below operating costs, according to contacts, despite layoffs and other efforts to reduce costs. Railroads and the trucking industry also reported a slight decline in demand that they attribute to the slowing economy. While transportation firms benefit from the drop in fuel prices, they say insurance costs have increased significantly.

Business service firms reported little change in activity, although some contacts have revised down their outlook for sales growth. Demand for temporary services remained soft. Contacts say they have revised down their outlook for the remainder of the year. The industry expects to continue to grow next year, but at relatively weak levels. Legal firms reported strong demand overall. Real estate and other transactional activity (mergers, venture capital) have dropped tremendously, according to contacts, but court cases and bankruptcy-related work is on the rise.

Retail Sales
Retail sales weakened in September and early October. Sales fell sharply during the week of September 11th, rebounded strongly, then tapered off. Sales are now below the pre-attack levels for most retailers--significantly below for some. Contacts say consumers are staying away from malls because of security concerns. Consumers have become more cost conscious and have increased purchases of consumables. Inventories are up--substantially for some retailers. Discounting has accelerated, which has reduced profits. Further discounting is expected. All retailers have reduced their outlook for sales growth, and several noted extreme uncertainty. In general, most are projecting a subdued holiday season. Retailers are reducing their seasonal hiring, and some are restructuring, laying off workers, or restricting hiring at the executive level.

Auto dealers reported a significant, sharp drop in demand after September 11, but sales have picked up over the past two weeks, boosted by many dealers offering zero percent financing. Contacts expressed concern that sales will drop off when the financing incentives are no longer available. Used car sales are down roughly 25 percent.

Financial Services
Loan demand continued to weaken. Deposit growth is mixed, with some institutions reporting continued slow growth and others, mostly smaller institutions and credit unions, reporting a pick up in the rate of deposit growth. In addition to new deposits, loan payoffs have accelerated dramatically in the last two months. Contacts expect delinquencies to increase later this year.

Construction and Real Estate
Overall construction and real estate activity fell since the last Beige Book. Single-family home sales suffered steep declines following September 11, but have bounced back a bit. Builders reported that home sale cancellations have increased steadily since the attacks. Selling prices are falling. The first-time buyer market continues to be strong, however. Multifamily activity has also declined, and contacts are deferring projects that "don't have to open."

Nonresidential markets remained very soft, particularly in tech-heavy Dallas and Austin. Office rents declined 15 percent in the last two months and are expected to fall another 10 to 15 percent before a turnaround. Contacts say subleasing has leveled off. The big box industrial market is overbuilt, contacts say, and projects have been shelved. Commercial builders are "getting hungry" as backlogs decline.

Drilling activity weakened considerably in the past six weeks. Oil demand dropped nearly 5 percent, led by a reduction in the consumption of jet fuel. U.S. drilling activity fell by 110 working rigs, with virtually the entire decline in gas-directed drilling. Offshore drilling, which declined sharply over the summer, has stabilized in recent weeks. Declines are now reported in expensive on-shore areas. Day rates for rigs continued to fall. Orders for oil services and equipment have softened some, but contacts reported that prices are still fairly good, boosted by international drilling. However, the domestic market is expected to soften substantially over the next few months. Some respondents expect the U.S. rig count, which is just over 1100 rigs, to fall to 800 rigs by early next year.

Agricultural conditions continued to worsen. Some areas remained dry, but heavy rains delayed harvest and damaged crops in other areas, bringing large financial losses for affected producers. Demand for cotton has turned sluggish, exacerbating already large world stocks. Cotton prices are low, and contacts say they could fall further. Beef demand also softened some, as eating away from home has declined. Supplemental feeding of livestock remained constant for many producers, but quantities were decreasing as pastures were improving.

Return to topReturn to top

Previous Kansas City San Francisco Next

Home | Monetary Policy | 2001 calendar
To comment on this site, please fill out our feedback form.
Last update: October 24, 2001