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Federal Reserve Districts

Eleventh District--Dallas

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Eleventh District economic activity showed signs of accelerating from early January to late February. Energy activity continued to strengthen, and some contacts at oil field service firms referred to conditions as booming. Manufacturing activity was also up, and retail sales were stronger. Reports from construction, real estate and the service sector were more mixed. There was little change in financial conditions. Agricultural conditions were favorable.

Strong demand for crude oil is keeping prices high. Crude oil prices fell below $42 per barrel in late December but recently moved back over $50 in late February. U.S. inventories of crude are above the five-year average. Gasoline prices have mostly moved with the price of crude inputs, and retail prices rose from $1.82 to $1.95 between early January and late February. Inventories of gasoline products have been helped by high levels of imports and are the highest February levels of the last five years.

Natural gas prices have stayed in a range of $6 to $6.50 per million Btu. Weather has not been severe enough to prevent winter inventories from building, and inventories are now 20 percent above the five-year average. Prices have not fallen, despite the strong likelihood the heating season will end with 1.2 trillion cubic feet of gas in storage. Some contacts expressed concern that storage might fill sufficiently that some summer gas production could be forced onto the open market which could lead to volatile prices.

Manufacturers continued to express concerns about rising costs for fuel, transportation and some raw materials. Some producers noted that these costs were squeezing profits, but there are more reports of manufacturers being able to pass cost increases to customers. A major exception was apparel, where prices continue to fall.

Labor Market
Labor markets remained generally slack, and there continue to be few reports of hiring. Still, conditions are uneven. There are some reports of hiring, such as for legal, accounting and food manufacturing. There are also reports of workers remaining unemployed for long periods. In Austin, workers are arriving from California in anticipation of finding work in the high-tech field.

A lack of qualified workers to support the energy industry has been reported as a significant constraint to expansion. Trained and experienced crews to work the rigs are a continuing problem. A large energy firm just announced plans to hire 1000 engineers and technical workers.

Overall manufacturing activity continued to strengthen. Demand for food products was up, and contacts were increasingly optimistic about the year. Demand for apparel products has been unchanged.

Contrary to the usual seasonal lull in construction during the winter months, manufacturers of cement, clay, brick, tile and glass continued to report strong demand. Robust demand has allowed 2 to 7 percent price increases since January. The recent upswing in construction also stimulated demand for primary metal. Demand for fabricated metals has been strong over the past couple of months. Inventories of fabricated metals were reported to be high. Some contacts say the higher inventories were in anticipation of future demand, and others cited fears of higher input prices.

High-tech manufacturing reported modest to good growth in orders. Contacts expect orders to continue at these levels, and one respondent noted that there doesn't seem to be any great new product on the horizon to stimulate a significant acceleration. Manufacturers of telecommunications equipment reported steady sales. Sales of wireless handsets have been particularly brisk, and inventories are lower than desired.

Refiner margins have slipped from high levels of the past few months to moderate in recent weeks because product prices have not kept pace with rising crude prices. Refiners that can use heavy or high sulfur crude are earning better margins than those relying on more expensive light sweet crude like West Texas Intermediate. Demand for chemicals has remained extremely strong and is outstripping capacity. Prices and profits are high for most chemical products, and significant capital expansion is expected on the Gulf Coast later this year.

Reports from the service sector remained mixed over the past six weeks. Temporary staffing firms say demand growth was slower than expected. Contacts are uncertain why their clients are being cautious, but some thought it might be the result of continued cost cutting.

Demand for accounting services remained very high and increased slightly. Demand has been strong for work to support business transactions, mergers and acquisitions, seasonal tax needs and Sarbanes-Oxley regulatory requirements. Hiring continued to increase. Wages, salaries and fees are also increasing. Legal firms also reported strong demand and increased hiring, salaries and fees. Litigation activity is flat, but demand is strong to support transactions. The cost of doing business is going up for most law firms--driven by malpractice insurance, health insurance and rent.

Demand for wireless telecommunications services continued to strengthen. Contacts say employment reductions are planned as a result of mergers, and continued consolidation in telecommunications services is expected.

Airlines are still reporting difficult conditions. Demand has picked up recently, but contacts say fares are too low to cover costs because distressed carriers are pricing their product below a profitable level. Respondents say less-than-free market conditions are allowing bankrupt carriers to stay alive, and these airlines need to liquidate to help the industry become profitable. High fuel costs also remained a concern.

Rail traffic was strong in the western United States, particularly for metallic ores, crushed stone, trailers and containers. Demand for trucking has been strong, but rising costs for fuel, insurance and equipment are a concern.

Retail Sales
Retailers reported stronger sales growth over the past six weeks. While there were some areas of weakness, such as for home furnishings, contacts said that customers appear to have more liquidity. Several retailers noted that sales were stimulated by lower gasoline prices but said the recent rebound in pump prices brings some uncertainty. Inventories were in good shape. Retailers reported rising input costs, particularly for products containing petrochemicals, such as plastics. Contacts said the recent strengthening of sales was allowing more of these cost increases to be passed on to customers. Costs and prices continued to fall for apparel, however.

Automobile sales in the District continue to be soft, down slightly from year ago levels, with inventories higher than desired. Railroads also reported moving fewer motor vehicles.

Construction and Real Estate
Construction and real estate markets were mixed. Demand for apartments was soft, and construction of apartments declined since the last Beige Book. Apartment occupancy continued to fall in Dallas and Houston, although rents appear to have stabilized, following declines through most of 2004. Austin's apartment market continues to improve, with less construction and steady demand. Existing home inventories continued to rise, but contacts said low mortgage interest rates spurred new home sales, and home construction edged up following a lull at the end of 2004.

Demand for office space has remained soft since the last Beige Book, but investor activity was still strong. Leasing activity continued to pick up slowly, but there are very deep holes to climb out of--especially in Dallas and Austin--according to respondents.

Financial Services
Contacts reported little change in financial conditions. Demand for lending was largely unchanged, with some contacts reporting a slight increase. There was a slight improvement in the overall quality of loans, and delinquencies were falling at some community banks. Foreclosures on commercial and industrial real estate loans were creeping up, however, and contacts said a lot of money is flowing into the real estate/mortgage sector--perhaps too much into retail. The financial industry reported that they are watching carefully to be sure that a real estate bubble does not form in Texas. Competition between lenders remains stiff.

Energy activity continued to strengthen, and optimism increased significantly. The U.S. rig count jumped 22 rigs during the past six weeks, including 13 rigs in Texas. Most new rigs were on land and primarily directed to natural gas. The number of rigs working in the Gulf of Mexico had weakened to only 93 but rebounded to 100 working rigs in recent weeks. Even so, activity in the Gulf remained lower than in 2000 and 2001--when the annual averages were 136 and 148 rigs, respectively.

Oil service companies reported that boom times are back for them, and they say they are finally sharing in the high prices enjoyed by producers for some time. Capacity is becoming an issue for many firms, with rigs and other services increasingly being signed up for multiple jobs to assure availability. Capacity is being added in manufacturing areas (such as oilfield tools), but activity is still being constrained by a lack of drilling crews, engineers, and many skill-sensitive service areas. Competition for these workers is heating up significantly.

Land preparation for spring planting moved ahead in drier parts of the District. Above-average rainfall improved soil moisture conditions and spurred growth of winter wheat but further delayed the cotton harvest and lowered the grade of the crop in West Texas. Ginning activities were active. Range and pasture conditions generally remain excellent, although there were reports of varied degree of livestock illness.

Strong global production of corn and cotton continues to push down prices for those crops. High natural gas prices have pushed up fertilizer and irrigation costs, leading contacts to expect farmers in the Texas Panhandle to switch away from corn production to crops that require less water, such as cotton, sorghum or sunflowers. Contacts expressed concern that the proposal to limit crop subsidies on farm income will affect farmland values farmer's ability to pay loan debt. Ranchers remain anxious about plans to re-open trade of live cattle from Canada.

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Last update: March 9, 2005