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Federal Reserve Districts

Eleventh District--Dallas

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The Eleventh District economy grew at a modest pace since the last report. Reports from manufacturers were mixed, and activity in the services sector rose slightly. The single-family housing sector remained weak, but activity in the multifamily sector was strong and the commercial real estate sector saw continued improvement. Financial services respondents said overall loan demand was flat during the reporting period. The energy industry continued to expand at a robust pace, while agricultural conditions deteriorated further in the District. Employment levels were stable at most responding firms and price pressures were unchanged. Numerous contacts said stock market volatility, declining consumer confidence and uncertainty regarding national economic conditions had dampened their outlook.

Overall, prices were unchanged from the last report, although there were some reports of price increases. Food producers noted a continued rise in commodity prices, particularly for corn. Accounting, legal and staffing firms reported slight increases in rates charged for their services, and airlines noted fare increases in the high single digits compared to last year's levels. Contacts in rail transportation said they had rolled back some earlier instituted increases in shipping rates, and airlines and cargo service firms reported benefitting from lower fuel prices. Retailers noted slight declines in overall prices, although increases were seen for high-end goods and certain products affected by higher cotton prices.

The price of WTI fell from near $100 per barrel in early July to $85 at the end of the reporting period in late August. Natural gas, gasoline and diesel prices fell since the last report, and prices for most petrochemical products were flat or down.

Labor Market
Most responding firms reported steady employment levels, and some noted slight hiring activity. Staffing firms continued to see steady demand at high levels. Most transportation equipment, food and metals manufacturers reported an increase in payrolls, and some said they had increased work hours as well. A few contacts at legal services, auto sales, energy, and transportation service firms reported modest employment increases. Wage pressures remained minimal, although upward pressure was noted by one transportation equipment manufacturer.

Reports from construction-related manufacturers were mixed, but suggest overall activity levels were unchanged. Manufacturers tied to residential construction generally reported continued sluggish demand. Primary metals manufacturers saw a broad-based increase in activity, and producers of lumber and wood products noted a pickup in demand partly due to remodeling projects. Construction-related outlooks remained weak, and some contacts expressed concern about the uncertainty surrounding the national economy and lack of sufficient backlogs.

Respondents in high-tech manufacturing report that growth in sales and orders weakened since the last report. Demand for basic memory products such as DRAM has weakened, while continued growth in demand for servers to store and process data has kept orders for microprocessors growing at a solid pace. Slow growth in Asia and increased uncertainty about the European and US economic outlooks has reduced business investment in high-tech products. The outlook for the next three to six months is for weak but positive growth.

Paper manufacturers reported that demand growth softened slightly during the reporting period, but remained better than last year's levels. Manufacturers of transportation equipment reported strong sales with demand flat to up since the last report and well above year-ago levels. Outlooks are optimistic, with contacts expecting demand to hold steady at current high levels over the next few months. Food producers reported a seasonal uptick in demand, but noted that they had seen a significant decline in overall sales compared with earlier in the year.

Petrochemical producers reported that after about six months of extensive plant outages, shortages of key materials, and dramatic price increases, resin and plastics markets have settled. Contacts said demand for most products remained good since the last report, with the exception of PVC products due to weak construction markets. Refiners said capacity utilization rates were the highest since 2007, and margins were strong based on good demand. Orders for oil products slipped in July, but strengthened again in August, according to contacts.

Retail Sales
Retail demand was unchanged since the last report, but sales rose in the mid-to-low single digits from a year ago. Back-to school sales activity picked up slightly. Apparel, especially women's clothing, and fine jewelry are segments that have shown strength recently. There is some concern regarding recent stock market volatility and its potential impact on consumer confidence, but this has not affected store activity, reported contacts. Sales in Texas and the Southwest region continued to outpace those nationwide by a slim margin, according to two large retailers, and expectations are for continued modest growth through year-end.

Automobile sales continued to improve, and contacts say supply issues from Japanese manufacturers should resolve by the end of September. Demand for used cars remained high, along with their prices. Contacts were optimistic and expect sales to increase through year-end.

Overall demand for staffing services held steady at high levels, although several firms noted slight declines in activity. One contact reported that temporary placements were being outpaced by direct hiring activity. Outlooks were more cautious than the previous reporting period, with contacts expecting demand to remain flat or decline through year-end. Demand for accounting services was flat, although contacts noted some strength in mergers and acquisitions activity. Legal firms reported continued solid demand for intellectual property, energy, IPO, and mergers and acquisitions services.

Reports from transportation service firms were mostly positive, but suggest that uncertainty surrounding the national economy has somewhat weakened outlooks. Intermodal cargo volumes increased since the last report. Railroad shipments rose slightly, with particularly strong volume growth in metallic ores, petroleum products and non-commercial building products. Container volumes declined during the reporting period, and contacts reported a weaker outlook than during the earlier reporting period. Small parcel shipments rebounded in August after declining in July, in part due to growth in retail trade activity. Airline traffic held steady over the past six weeks. Demand for travel within the US and to Latin America was solid, but travel to Asia and Europe remained weak. Airline contacts expect to see modest improvement in revenues in the fourth quarter.

Construction and Real Estate
Contacts in the single-family housing industry said new and existing home sales rose slightly since the last report, although the market remains weak overall. Existing home inventories declined and new home inventories remained lean. Respondents are cautious in their outlooks, but most expect a slight improvement in sales in the second half of the year, with a slow recovery taking hold by early 2012.

Apartment demand was strong during the reporting period, and rental rates continued to rise. Contacts also noted increased sales of apartment properties. Leasing activity for office and industrial space continued at a moderate pace since the last report. Contacts noted strong demand in Houston stemming, in part, from energy activity.

Financial Services
Most financial firms reported relatively flat loan demand, with the exception of one contact who noted a slowdown in lending activity. Contacts at national banks said they are concerned about the loss of momentum for a self-sustaining recovery and are seeing customers approach borrowing decisions conservatively. Regional banks said loan pricing remained aggressive. Outlooks are generally less optimistic than the prior reporting period, although outstanding loan quality remains stable and there continues to be gradual improvement in lending conditions.

Texas drilling activity rose since the last report, with the state adding 43 rigs over the past six weeks. Most of the demand is from land-based drilling, led by horizontal drilling and fracturing. Initially applied to natural gas formations, success is growing in application of these technologies to oil basins, such as the Permian Basin. Contacts noted that activity in the Gulf of Mexico remained weak, with only a few recent permits approved for drilling.

Drought conditions remain severe and agricultural losses in the state have reached $5.2 billion, surpassing the 2006 record of $4.1 billion, according to Texas AgriLife Extension Service estimates. Dry weather and high temperatures have reduced yields and increased abandonment of crops. The livestock sector has also suffered greatly, with very poor grazing conditions necessitating costly supplemental feeding and in many cases the selling off of herds. An increase in the number of cows and calves being sold has dampened cattle prices. Grain prices have generally increased since the last report, partly driven by lower production expectations. Strong export demand for beef has benefitted the district's livestock sector.

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Last update: September 7, 2011