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Federal Reserve Districts

Eleventh District--Dallas

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The Eleventh District economy grew at a moderate pace since the last report. Manufacturing activity was mixed. Contacts said retail sales were robust and automobile sales held steady. Demand for business services was solid, and activity in transportation services rose modestly. Housing and commercial real estate markets continued to improve slightly. Construction activity remained subdued, with apartment construction being the major exception. Financial services respondents said overall loan demand was flat to up slightly. Energy activity slowed somewhat, but respondents expect strong growth in activity in 2012. Agricultural conditions remained weak. Employment levels were mostly unchanged. Price and wage pressures were subdued.

Contacts across industries said prices held steady or declined. The exceptions were producers of paper, fabricated metals and food who noted increased prices for some inputs. Crop commodity prices were generally lower than six weeks ago, while cattle prices held fairly steady.

The price of WTI moved in a narrow range between $95 and $100 per barrel during the reporting period. Natural gas prices remained low, near $3.50 per thousand cubic feet, due to unseasonably warm weather and large inventories. Diesel and gasoline prices declined by 20 cents per gallon over the past six weeks, and prices of petrochemicals and plastics held steady or fell slightly.

Labor Market
Employment levels were flat to up slightly at most responding firms. Staffing firms continued to note high levels of demand. Energy industry respondents said labor shortages for skilled workers, such as engineers, geologists, and machinists, remained a barrier to expansion. Some producers of food, fabricated metals and transportation equipment noted moderate employment increases, and auto dealers said they continue to look for additional workers. Wage pressures remained minimal, although staffing firms noted modest increases in billing rates for skilled workers. Several firms noted plans to give employees cost-of-living adjustments next year.

Construction-related manufacturers' responses were mixed. Stone, clay and glass producers said demand was below expectations, while lumber producers noted no change in activity. Fabricated metals producers said demand had increased since the last report, and some reported a pickup in private nonresidential projects, especially from foreign investors. Primary metals demand was mostly stable and was characterized as "decent but not great." Construction-related firms' outlooks are cautiously optimistic for 2012.

Respondents in high-tech manufacturing reported that sales grew at a weak to moderate pace since the last report. Sales and prices for DRAM continued to be very weak, while demand and prices for processors were holding up much better. Respondents said that increased demand for mobile devices and data storage should drive up demand for semiconductors by the second quarter of 2012. Respondents noted, however, that economic uncertainty remains very high.

Conditions in the paper industry were mixed. Most contacts noted weakness, although one reported an unusually busy December with strong orders from the auto and construction industries. Respondents expect conditions to remain about the same in 2012 as in 2011. Automobile and aviation equipment manufacturers said demand had picked up slightly since the last report. Expectations are for stronger sales of automobile equipment in 2012, but aviation manufacturers expect only modest growth. Food producers noted a pickup in demand since the last report, in part due to stronger consumer demand, and partly due to increased market share. Outlooks among food industry contacts remain positive.

Petrochemical producers noted a seasonal slowdown in demand for most products. Producers of plastics and plastic feedstocks said prices and inventories stabilized after sharp declines in October and November. Demand for chlorine showed weakness beyond the normal seasonal slowing, and some contacts attributed the weakness to slower global growth. Contacts in the refining industry noted weak domestic consumption of refined products, especially gasoline, although export markets were still strong. Inventories were said to be near expectations for this time of year. While both gasoline and diesel prices slipped over the past six weeks, refiners' margins remained at healthy levels, according to contacts.

Retail Sales
Retailers said sales activity was robust during the reporting period, and retail sales growth saw moderate gains over the comparable year-ago period. However, contacts noted consumers remain cautious and value-driven. The Eleventh District and Midwest in general exhibited stronger sales growth than other parts of the nation, according to the responding firms. Inventories have increased over the prior year, but are at desired levels. Jewelry, small electronics and apparel were areas of strength in retail this holiday season.

Automobile sales held steady from the prior report and have increased year-over-year. The used car market remains tight. Contacts expect 2012 will be another good year, with moderate increases in sales. Vehicle inventories are back to normal levels for the most part, although some contacts reported light inventories due to increased activity.

Staffing firms continued to report high levels of demand. However, some contacts noted a slight slowdown in activity as some clients delayed hiring until the start of 2012. Direct hires continued to drive business, with particularly strong demand for professional and technical workers. One contact noted a shortage of skilled IT professionals. Outlooks were more optimistic than in the last report, with contacts expecting demand to remain robust or improve next year. Demand for accounting services remained flat, and overall growth this year has been slightly weaker than expected. Legal firms reported steady activity, with continued strength in demand for intellectual property, energy, litigation and some real-estate services and a slight pickup in corporate activity.

Reports from transportation service firms were positive. Intermodal firms reported steady cargo volumes during the reporting period, and outlooks are positive for the first half of 2012. Railroad firms noted a broad-based increase in shipments, with particularly strong growth in petroleum products, motor vehicles and equipment, nonmetallic minerals, crushed stone, metals and metallic ores. Small parcel shipments rose strongly during the reporting period.

Airlines reported steady passenger demand over the past six weeks. Domestic demand and travel to Latin America remained solid, and travel to Europe and Asia improved slightly. Airline contacts expect demand to remain stable in the short term.

Construction and Real Estate
Housing industry contacts continue to report improving conditions overall, although sales activity remains at low levels. Home sales rose at a modest pace over the reporting period and new and existing home inventories continued to decline. Contacts are hopeful that the housing industry is poised for a recovery in 2012. Apartment demand remained steady since the last report and contacts characterize Texas markets as tight. Apartment construction continues to increase, and contacts noted that multi-family properties are the favored property type among real estate investors.

Conditions in nonresidential property markets continue to firm, according to most contacts. Demand for office space continued to rise modestly since the last report, and there were some reports of improvement in demand for warehouse and retail space. Nonresidential construction activity remains at low levels, and some contacts noted concern about 2012 as public projects come to a close. One contact noted that while conditions have improved overall, real estate financing remains a challenge due to weak consumer sentiment and higher investment risk.

Financial Services
Financial firms reported flat to modest increases in loan demand. National banks noted a pickup in both middle- and large-market corporate lending activity. Regional banks said loan demand was mixed, with strength in energy-related lending and weakness in other loan activity. Loan pricing remained competitive. The quality of loans outstanding continued to improve, with contacts noting a decline in problem loans. Outlooks are uncertain given mostly sluggish loan demand.

Oil field activity slowed seasonally at year end, with the District rig count edging down. However, respondents expect a high level of activity to resume early in 2012 and increase throughout the year. Respondents cited strong orders, growing backlogs, and good pricing for their products as evidence of future growth.

The District remained largely in drought, although recent rainfalls have lessened the drought's severity in most parts and benefitted the winter wheat crop. There is still very little grazing available, resulting in costly supplemental feeding of livestock. Demand for agricultural products receded slightly over the reporting period, although beef exports remained strong.

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Last update: January 11, 2012