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Beige Book logo links to Beige Book home page for year currently displayed November 28, 2001

Federal Reserve Districts

Eleventh District - Dallas

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Eleventh District economic activity slowed somewhat from mid-October to mid-November. Many contacts mentioned that economic uncertainty is discouraging business and consumer spending. Some contacts said they do not expect a pickup in activity until the second half of 2002 or later. Manufacturing activity declined slightly, and demand for business services continues to slow. Retail sales continued to be well below plan for many stores. Construction and real estate activity continued to slow, and the energy industry continued to weaken. Financial service firms reported little change in loan demand. Rains improved agricultural conditions in some locations, but most areas remained dry.

Prices and Labor Markets
Prices are lower for many manufactured products, including steel, paper, cement, glass and some high-tech products. Further price declines are expected in the near future for some products. Cost pressures were also lower, with many industries reporting lower prices for utilities, fuel and shipping. As of mid-November, crude oil inventories were up 3 percent since September 11th, and contacts say markets remain concerned that demand may fall further. Heating oil inventories were up 4 percent. The retail price of gasoline fell over 25 cents at the pump since the last Beige Book, to the lowest level of the last two years. Gasoline inventories were up 6 percent.

Labor markets loosened significantly, and contacts say wage pressures have slackened for the first time in a long time. Many firms say they are not hiring, and several retailers say they expect to hire fewer extra holiday workers. Layoffs and early retirement incentives continued in the transportation and telecommunications industries, where some firms have reduced executive pay.

Overall manufacturing activity declined slightly. Paper producers reported little change in sales in late October and early November, which are down significantly from a year ago. Apparel manufacturers reported strong sales to discount stores, but slowing sales to other vendors. Only food manufacturers reported stronger than expected demand.

Most high-tech manufacturers said that, in early November, sales had flattened following some moderate declines after September 11th. The weakening economy and increased uncertainty since the terrorist attacks have pushed back the expected recovery of their industry from the first quarter to the third quarter of 2002. While most high-tech firms continued to cut jobs, the rate of layoffs is slowing. Selling prices are weak, but several firms noted that prices for memory chips are firming. Most respondents said inventories are very lean. Telecommunications firms said demand continued to decline over the past month, down 20 percent to 30 percent. One contact said demand is down 80 percent from this time last year.

Most construction-related manufacturers, including brick and lumber, reported a drop in demand between mid-October and mid-November, mostly due to slower home building. New orders for cement also declined, although the industry continues to supply projects delayed by rain in August and September. Glass sales were "decent" according to contacts who expect sales to slow with home building. Demand for primary and fabricated metals fell, partly due to declining energy activity. Production of metals has been unchanged, however, because manufacturers have been reducing backlogs. One contact said a lot of the existing activity is related to government contracts.

Refiners increased output seasonally on the Gulf Coast in October. Margins declined slightly from moderate levels in September. Petrochemical producers reported little change in activity. Demand remains weak, but there was some indication of a pickup in the third quarter, mostly because lower input costs had improved the international competitiveness of domestic producers. Still, a large overhang of capacity has kept profit margins weak because any cost savings from lower natural gas prices is being passed on to customers.

Service sector activity continued to slow. Only legal firms reported strong demand for their services, particularly for bankruptcy and credit activities. Temporary service firms say activity has slowed faster than expected. Transportation firms reported continued declines in passenger and cargo shipping volume. The trucking industry has become more pessimistic, expecting shipments to slow over the next three months due to slowing in home construction.

Airline passenger volume remains significantly lower than the levels reported three months ago. Business travel has decreased, with travel to Asian and European markets weakening. Airfares have been reduced in an effort to stimulate passenger volume, but costs are up, due to stricter security and other regulations.

Retail Sales
Retail sales as of mid-November continued to be well below plan for most stores, and contacts say profits are suffering. Sales are still strongest at stores that are perceived to offer value and stores that are perceived as safer, such as those away from malls. Consumers remained focused on purchases of consumables and items that are perceived as not frivolous. Contacts say selling prices are unchanged or slightly lower, with the only cost pressures coming from soaring property insurance and health care costs. However, one contact noted that margins are shrinking for many suppliers and there may be a lot of pent up inflation when demand picks up.

Auto dealers reported record sales, fueled by zero percent financing. All contacts expressed concern that the market has been saturated, and dealers said that sales are already slowing despite an extension of the financing incentives through mid-November. The used car market has held up surprisingly well, according to contacts, because some people do not qualify for zero percent financing.

Financial Services
Financial service firms reported little change in lending demand in late October and early November. Deposit activity remained at a level somewhat higher than reported earlier this year. Loan prepayments continued to be stronger than usual, and money received from transfers out of brokerage accounts have accelerated. There were no reported changes to delinquency rates or other indications of a slowdown in bank performance measures.

Construction and Real Estate
Construction and real estate activity continued to slow. Single-family builders reported a strong pick up in sales volume, spurred by low interest rates, incentives, and price cuts. Still, cancellation rates remained high--from 20 percent to 40 percent--compared with the rate before to September 11th. Nonresidential activity continued to decline. Rental rates continued to fall, and there is no new construction being planned, according to contacts who say markets are expected to get worse before they get better.

Energy activity has gone from overheated to very cool in a short period of time, according to contacts. The U.S. rig count fell in mid-November to near 1000 working rigs from 1300 in late July. Utilization rates for rigs in the Gulf of Mexico have declined to just under 60 percent from over 90 percent in the spring. As the result of weaker demand, prices for oil services and rigs have weakened, although strong pockets of domestic activity and high levels of activity in international markets are propping up revenues and profitability. Companies reported that they are delaying layoffs, hoping for a quick rebound in the demand for natural gas along with the U.S. economy.

Rains improved agricultural conditions in some locations, but most areas remained dry. Harvesting of remaining summer crops continued, and planting of small grains was under way. Many areas were short on planting moisture, however, and emergence was not expected because soil moisture was inadequate. Some replanting was under way. Range and pasture conditions declined as dry weather continued, and supplemental feeding of livestock continued to increase. Hay shortages were becoming more widespread. Herd reduction continued to be necessary in some areas as a direct result of dry conditions.

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Last update: November 28, 2001