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Federal Reserve Districts


Eleventh District--Dallas

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Summary

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The pace of economic activity in the Eleventh District continued to decelerate from mid-November to early January. The energy industry remained robust and lucrative, stimulating some manufacturing, construction and service-sector activity. But other activity has been dampened by slowing home construction, high energy prices and a general concern about disruptions to credit markets and the slowing U.S. economy.

Overall manufacturing activity has continued to soften, and retail sales are weaker. Service sector activity has slowed some but is still quite strong. Home construction continued to decline but commercial and multifamily activity is brisk. Financial service firms said consumer lending had slowed, but commercial lending was still quite strong. Agricultural conditions have been favorable.

Prices
High or rising input costs are squeezing margins for most industries. Still most contacts say competitive pressures are restraining selling price increases--at least for now. Oil prices were pushed up by a weakening dollar, geopolitical turmoil and a sharp decline in U.S. crude inventories. Rising oil prices boosted gasoline and natural gas prices. After significant increases earlier in 2007, price pressures eased for petrochemicals and plastics at year end, but the rise in energy prices is expected to push petrochemical prices up further. Aluminum prices remain high, and copper and steel prices have risen. Contacts say steel inventories are high but significant price increases are expected because of speculation that imports are dwindling. Strong demand and rising input costs continue to push up prices for agricultural commodities and food products.

Labor Market
Labor markets softened. Home builders are still reducing their workforce, and some manufacturers have eliminated shifts or reduced overtime. Still there are some shortages of skilled workers, particularly mechanics. Upward wage pressures remain, and some firms, particularly in the service sector, expressed concern about large increases in health-care costs.

Manufacturing
Factories reported continued weak sales of products for home building, including cement, glass, brick, lumber and metals--with demand for many products significantly below the levels of a year ago. Producers who sell to national markets said sales to builders in Texas continued to be a bright spot, particularly in San Antonio and Austin. Some firms said sales remained solid for commercial construction, but others reported softening and apprehension that commercial building is slowing.

Food producers say domestic sales remain solid, and some have boosted sales by expanding to international markets. Demand for transportation manufacturing was strong, particularly to supply the chemicals and energy industries. Demand is also strong for government-funded emergency service vehicles.

Manufacturers of corrugated boxes reported a noticeable slowing in sales and higher inventory in December. Contacts say customers are reducing stock in anticipation of a slowing economy. These producers have become much less optimistic about the outlook since the last Beige Book. Sales of other paper products have also weakened, but sales volumes remained above year-ago levels. High-tech factories reported slowing activity since the last survey. Demand from Asia and India remained strong, but sales have been moderate to Western Europe and the United States.

Demand for plastics and petrochemicals has slowed. Weak sales to automobile manufacturers and homebuilders continued to dampen domestic activity, and there has been a recent softening of export demand for several important petrochemicals and plastics. Refinery utilization held at about 90 percent, which is typical for this time of year.

Retail Sales
Retail sales continued to weaken since the last report. Most retailers said sales were below year ago levels and placed most of the blame on high gasoline costs. Companies with national stores continue to say Texas sales are stronger than the rest of the country. Competitive pressure held selling prices down over the holiday season, but some retailers expressed serious concern that rising input costs already in the pipeline will force up selling prices in late spring. Overall automobile sales are weaker than a year ago, but sales of imports and hybrids remain strong. Dealers also reported strong demand for parts and service. Sticker prices have been stable, but there are many incentives in place, even for imports.

Services
Employment firms reported sluggish demand for temporary workers, but the need for direct hires remained strong. There is some demand from manufacturing, such as for plastics and railcar production, but demand is strongest for higher-skilled clerical workers to supply call centers, banks and credit collection agencies. There continues to be weak demand for entry-level low-skilled workers, particularly in manufacturing. Law firms say activity is still strong despite some slowing in merger and acquisition work. Litigation work continued to increase, and bankruptcy activity is up substantially at some firms. Accounting firms say activity continues to be as good as or slightly better than last year. With tax season approaching, respondents are optimistic about the outlook for activity, in part because of increased work necessary for the Texas margins tax--a corporate tax that is replacing the franchise tax and will be collected for the first time in May 2008.

There has been some slowing of cargo volumes. Intermodal transportation of imports has fallen and has not been completely offset by exports. Overall rail shipments remain strong, with sizeable gains in grain shipments offsetting decreases in other commodities. Small parcel cargo and container trade values remain good, but contacts expect slightly slower growth this year. Demand for air travel remained moderately strong overall, but there are some hints of softness.

Construction and Real Estate
New and existing home sales continue to edge down and are well below a year ago. Traffic was slower than usual in December, and contacts say this suggests sales may weaken in January. Inventories of homes for sale are at relatively good levels, and prices remain generally steady. Although home starts continued to decline, contacts said this partly reflects a lack of cash flow for builders who have national operations. Apartment construction remains aggressive, and rents are rising. Demand for apartments has been boosted by customers who previously, but no longer, qualify for home mortgages. Contacts have few concerns about overbuilding, but say the outlook depends, in part, on when and if lenders slacken recently tighter credit standards on home buyers.

Office and industrial development activity continued at a strong pace. Rents continue to increase, but office demand has slowed recently. Credit market turmoil is still reducing investment activity, but there has been a little improvement since October calming market participants.

Financial Services
Demand for all types of consumer loans continues to soften, which contacts attribute to weak demand rather than tighter lending standards. Respondents say consumer demand has softened because of high energy costs and a general concern about economic slowing. Credit unions reported an increase in savings deposits that they consider a “flight to quality.” Other institutions, however, said that they were having difficulty raising enough deposits to fund loan growth, and one is considering using less traditional sources to obtain funds.

Regional commercial bank contacts say commercial real estate lending has remained strong and competitive. There has been some tightening of lending standards by banks. However, most borrowers who had used structured investment vehicles or the commercial mortgage backed securities market are no longer getting funding from those sources. Respondents say it is hard to price the value of assets with fewer transactions in these markets, and this is disrupting some deals.

Energy
Global demand for energy remained strong. The Texas rig count jumped sharply in November and December, led by natural gas drilling in the Barnett shale. Demand for oil services remains at very high levels, and there are few expectations that it will decline in the near future. International activity is also high. Drilling rigs and pressure pumping have some overcapacity, and most other services are still experiencing only modest price pressure.

Agriculture
Domestic and global demand remained strong. Crop yields were steady. Weather conditions have been normal, and the outlook is positive for the spring.

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Last update: January 16, 2008