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Federal Reserve Districts

Eleventh District--Dallas

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Economic conditions in the Eleventh District firmed over the past six weeks. Activity improved in several industries--including high-tech manufacturing, paper, petrochemicals, staffing services, housing and energy. Notable exceptions were financial services and commercial real estate, where contacts noted deteriorating conditions. Outlooks are generally more positive in tone, although most respondents do not expect a significant pickup in economic activity in the near term.

Most contacts said prices held steady with a few exceptions. Legal, staffing and accounting service firms noted continued pressure to lower fees. Construction costs continued to decline, and intermodal firms said they have dropped prices to attract new customers. In contrast, retailers said low inventories led to fewer discounts, especially for high-end merchandise. Construction-related manufacturers noted that increases in energy and industrial metals prices were putting pressure on margins.

Crude oil prices rose from $70 per barrel in early October to near $80 at the end of the reporting period in mid November. The increase was only partially passed through to refined products such as diesel and heating oil. Natural gas prices were volatile during the reporting period and rose to $4.50 in mid November. Natural gas inventories continue to rise due to weak industrial demand and unseasonably warm weather. Prices for chemical products were mixed.

Labor Market
Most contacts reported stable employment levels noting that they have made the necessary cuts. Still, there were scattered reports of payroll declines from energy and construction-related contacts. Retailers said holiday hiring was lighter-than-normal because of uncertainty surrounding this year's holiday season, and some retail respondents have increased hours of current employees rather than hiring new workers. On a positive note, staffing firms reported improved demand for contract workers, and a few contacts in the transportation service industry noted some hiring. Wage pressures were mostly nonexistent and cuts to 401(k) contributions instituted earlier remained in place.

In general, construction-related manufacturers said demand held flat at low levels, although one housing-related contact said orders weakened. Outlooks were pessimistic, mostly due to expectations of prolonged weakness in commercial real estate.

High-tech manufacturing firms said demand continues to grow at the same or slightly stronger pace since the last Beige Book. Capacity utilization is increasing, and inventories are at or slightly below desired levels. Most contacts were cautiously optimistic about the near term.

Reports from transportation manufacturers were mixed. Orders remained weak for aircraft and parts, but demand for industrial trailers picked up in recent weeks. Industry outlooks in general were more positive than in previous reports. Respondents in the paper industry said conditions improved over the past six weeks. Corrugated container manufacturers were more optimistic than in previous reports. Food producers noted demand had picked up unexpectedly since the last report, and outlooks were more positive.

Petrochemical demand remained much the same as in the last report. Domestic demand increased moderately, and export demand stayed strong--driven by cheap natural gas versus relatively expensive oil and a weaker dollar. However, exports to Asia softened over the past several weeks. Refiners have cut production due to weaker demand and lower margins for diesel and heating oil.

Reports from retailers point to stabilization, as year-over-year sales comparisons have become less negative. Contacts say high-income consumers spent more over the past six weeks, and value retailers saw better sales of apparel, house-wares and televisions. Still, lower-income consumers remain very price conscious. As in the previous report, Texas sales were tracking the national average. Outlooks were improved, although most contacts remained uncertain about upcoming holiday sales.

Automobile sales improved over the past six weeks after falling sharply at the end of the cash-for-clunkers program. Most contacts expect conditions to remain flat in the near term.

Staffing firms say demand continues to tick up and orders are streaming in at a consistent pace. Demand is still largely for contract work, and orders for direct hires are flat at low levels. Although contacts are more upbeat this time around than the last Beige Book, the short-term outlook remains cautiously optimistic.

Demand for legal services remains flat and depressed, with corporate, bankruptcy and litigation work still sluggish. Outlooks are bleak and many contacts expect lower revenues for 2009 compared with last year. Accounting firms say that demand for their services is holding steady at subdued levels, and noted a small uptick in inquiries from clients on merger and acquisition related services.

Intermodal firms reported a slight increase in cargo volumes but said demand is still well below last year's levels. Shipping firms continue to see a broad-based increase in large freight volumes, and said small parcel volumes held steady and were above year-ago levels. Contacts in railroad transportation noted a sizable and widespread decline in shipments since the last report. Airlines report conditions have stabilized. Fares are edging up, and demand for leisure travel has rebounded while that for business travel is slowly improving.

Construction and Real Estate
Both new and existing home sales picked up significantly over the past six weeks, although the level of activity remains weak. It remains to be seen whether the increase is due to the first-time homebuyer tax credit or a more sustainable trend. Some contacts said it is likely that the tax credit has accelerated sales that would have occurred in spring 2010. Housing inventories remain in relatively good shape, and contacts expressed relief that home values appear to be firming, never having fallen as sharply as in other parts of the country. Housing construction continued to edge up.

Commercial real estate conditions remain weak. Demand for existing space continues to fall and rents are trending down. Commercial construction is at historically low levels. On the financial side, contacts noted increased uncertainty about the prospect of renegotiating terms on commercial real estate loans coming due, especially given that the value of collateral has declined. Debt markets remain challenged, but there are signs that conditions may be improving. Contacts said some debt providers are becoming more interested, although they are very selective about assets on which they will lend.

Financial Services
Financial services contacts continue to report weak conditions and expect no significant improvement until late 2010 or early 2011. Loan demand softened further over the past six weeks. Commercial real estate lending remains very low and highly scrutinized, and community banks reported a recent pull back in residential real estate lending due to tougher regulatory requirements. Credit quality continued to deteriorate, mostly for consumer loans according to contacts. On a positive note, respondents said there was more liquidity sitting on the sidelines waiting to enter the market, as investors are becoming more interested in good deals.

The Eleventh District rig count continued to rise over the past six weeks. However, contacts remain uncertain in their outlooks, as oil-directed drilling is not expected to carry activity much further. Natural-gas related drilling--while improving--remains weak and inventories are at record levels.

Rainfall continues to alleviate drought conditions in many parts of the state. The moisture has improved pastureland and ranchland conditions, halted the sell-off in cattle herds and made cattle producers more optimistic about winter grazing conditions. The winter wheat crop is also benefitting from the precipitation. Although recent rains have been beneficial, they have increased pest problems and damaged the cotton crop in some parts of the state. Harvest of cotton, corn, peanuts and sorghum is moving ahead at a normal pace.

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Last update: December 2, 2009