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Federal Reserve Districts

Eleventh District--Dallas

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Eleventh District economic activity continued to expand at a moderate pace from mid-November to early January. While still mixed, manufacturing activity strengthened some, particularly for chemicals and energy-related products. Service sector activity was still strong, but there was some softening in demand for temporary workers. Retail sales were mixed, while construction and real estate activity picked up slightly. Energy activity continued to strengthen. Overall lending and deposit activity continued to grow, and credit quality remains stable. Agricultural conditions have been favorable.

Energy prices fell during the period but still remained relatively high in comparison to 2002 and 2003. Crude oil prices are down since November, and crude inventories moved above the five-year average in December, after being below the five-year average all year. Heating oil and retail gasoline prices have also fallen. Inventories of heating oil remained near the bottom of their five-year range, but inventories of gasoline returned to normal. Natural gas inventories are more than 10 percent above normal, and prices have fallen but remain very high compared to average prices in 2002 and 2003.

Manufacturers continued to be concerned about input cost pressures. Several industries said high energy prices have pushed selling prices up more than is typical for this time of year. Declines in the value of the dollar have increased the cost of some inputs, such as fabricated metals. Stiff competition is limiting the ability to pass along cost increases. Rising prices for coke, coal, steel and aluminum have led to slight increases in selling prices for some primary metals. Higher input costs for paper products have pushed up selling prices for toilet paper, tissues and paper towels, but stiff competition is putting downward pressure on prices of corrugated boxes. China's demand for aluminum has raised selling prices here, according to contacts. Rising cost pressures are also a concern for contacts in the service sector. Some firms are able to pass these cost increases onto their customers, but in other industries, contacts say stiff competition limits their ability to raise selling prices.

Labor Market
Labor markets remain quite soft overall, but appear to be slowly improving. Hiring continues to gradually strengthen in the service sector, with scattered reports of difficulty finding qualified workers in some occupations. Some manufacturing firms continued to report limited hiring or additional layoffs. Contacts in the lumber industry, however, report plans to increase employment.

There were more signs of strengthening in the manufacturing sector from mid-November to early January. Demand for construction-related manufactured products has been stronger than usual for this time of year, partly because late fall rains pushed construction work into December. Lumber sales remained at high levels and producers of stone, clay and glass said demand was higher. Holiday demand for food products was stronger than usual, according to contacts, who said this was a very strong year for the food industry. District apparel manufacturers report no change in demand. Producers of paper and paper products also reported no change in demand over the past few weeks.

Sales growth increased slightly for semiconductor manufacturers. Producers noted continued gains in productivity and little overall job growth. Inventories were reported to be in good shape. Demand for consumer communications equipment slowed slightly at the end of the year after very strong growth in the first three quarters of 2004. Producers noted that demand for products, such as cell phones and personal communication devices, was strongest from markets outside the United States, such as from Asia and Europe. Demand picked up slightly for industrial communications equipment, such as switches and power sources, and growth is now about the same as a year ago. These firms say demand from businesses has improved recently but consumer activity has been unchanged over the past year. Further layoffs are anticipated as a result of investments in productivity-enhancing capital equipment.

Demand for primary and fabricated metals was unchanged from mid-November to early January. Sales of primary metals continued to be slower than in the third quarter--for some metals substantially slower. Contacts continued to cite lower levels of consumer confidence and foreign trade competition as possible reasons for slower activity, expressing concerns that China may become a net exporter of steel. While overall employment has been unchanged, employees are working shorter hours.

Chemical producers continued to report strong increases in activity. Domestic and international demand has been strong for chlorine, caustic soda, ethylene and olefin products. Contacts say that record exports were stimulated by gains in the price of oil relative to natural gas, as well as a drop in the value of the dollar. Demand for polyvinyl chloride (PVC) also remained strong, although rising ethylene prices have squeezed margins. A major new PVC and chlor-alkali complex was announced on the Gulf Coast, the first major expansion announcement since the late 1990s. Gulf Coast refiners have finally returned to high levels of operation following hurricane-related downtime.

Temporary staffing activity softened slightly in the six weeks since our last report. Demand from light industrial manufacturing remained strong while demand for clerical workers slowed. Contacts said they are concerned about being unable to raise fees to completely offset an increase in their state unemployment tax rates. Demand for accounting services remained very strong. Activity was still mostly to support requirements of the Sarbanes-Oxley legislation. Contacts say firms are hoping to be more efficient complying with regulations this year because they have experience with the new rules. Accounting companies are still hiring "a lot of new people," and one contact said his firm had to turn away work for a lack of professionals to staff the project. Demand for legal services has been strong, driven by both transaction and litigation work. Hiring is up, and fees for legal services are rising, but not dramatically. Costs are largely unchanged, they say.

Railroads reported strong demand and rising prices. The trucking industry reported steady demand. Contacts say profits are being squeezed by high fuel prices and medical insurance costs because intense competition limits their ability to pass on cost increases to selling prices. Demand for air travel was up over a year ago, and airline industry contacts said planes have been flying fuller. Still, excess capacity is putting downward pressure on prices, keeping airlines focused on cutting costs to improve their balance sheet positions. Further layoffs are expected at some carriers.

Retail Sales
Retail sales reports were mixed. The Christmas season started slowly, but sales growth picked up as the holiday approached and were strong in the days after. Stiff competition and weak sales early on led to significant discounting at some stores, but other contacts reported good margins. Only a few retailers were left with excess inventory. Auto dealers reported sluggish sales and inventories are higher than desired. Selling prices and profits are down.

Construction and Real Estate
Demand for housing picked up from mid-November to early January, following a cooling that was reported in the last Beige Book. Realtors and home builders expect a slightly slower year in 2005, and remain focused on the need for job growth to stimulate activity. Multifamily contacts said Austin's market continues on the road to recovery, but Houston and Dallas' apartment markets have been overbuilt and may not see improvement until mid-2005. There is still a lot of vacant commercial space, but contacts said office leasing continued to pick up at a slow, steady pace.

Financial Services
Lending activity continues to increase, with the strongest loan growth in commercial and industrial categories. Mortgage lending is showing serious signs of slowing, according to contacts. Deposit growth was reported to be stable to good, and credit quality was unchanged. There are concerns, however, that credit quality could begin to suffer in a few quarters due to competitive rate pressures between the large number of banks in the larger Texas cities.

Land drilling has been mostly unchanged, but there was a pick up in offshore activity, with the number of rigs working in the Gulf of Mexico rising above 100 for the first time since a year ago. The increase is in oil-directed, deep-water drilling, with little change in shallow waters. Rates have been rising for deepwater rigs for several months, but long-term contracts have been limiting availability. Some contacts expressed the view that the recent leveling of drilling in the U.S. reflects a shortage of land rigs. Demand for oil services has increased with drilling. Contacts expect capital expenditures by oil producers to increase as much as 10 percent next year. Some contacts said such expansion plans might be constrained by shortages of equipment and/or workers with needed skills and that would lead to increases in the costs of these inputs rather than increased activity.

Soil moisture is adequate, but late fall rains delayed cotton harvest in the Plains, and cotton gins are expected to run through March, which is unusually late. Ranchers have expressed concerns about plans to re-open live cattle trade with Canada.

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Last update: January 19, 2005