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Federal Reserve Districts

Eleventh District--Dallas

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The Eleventh District economy expanded moderately over the past six weeks. The energy sector continued to be a source of strength, and staffing firms reported demand held steady at high levels. Retailers said holiday sales were on track to exceed those of last year. Reports from the manufacturing sector were mostly positive. Construction activity in the district remained subdued and loan demand was weak, however.

Price pressures increased slightly since the last report. Many responding firms noted higher input prices, and a few had increased selling prices including firms in the food, paper, staffing, airline, shipping, and primary and fabricated metals industries. Retailers said prices held steady, but were expected to increase in the second half of 2011.

The price of crude oil increased about $10 per barrel during the reporting period based on continued strength from Asia, better demand in the US, and a weaker dollar. Retail prices for both gasoline and diesel rose with the price of crude. The price of natural gas edged up seasonally, early in the reporting period, but fell back to near $4 per McF by late December due to weak demand and large inventories. Prices for most petrochemical products continued to rise since the last report, according to respondents.

Employment levels held steady at most responding firms, although there were some reports of hiring. Staffing firms were hiring for their own needs and in anticipation of continued strong demand going forward. Primary metals and high-tech manufacturing firms reported increasing payrolls, and airlines were hiring in call centers and at airports. A few contacts in the energy industry said they were looking for workers to fill very skilled positions. Wage pressures were minimal.

Most construction-related manufacturers reported steady demand at low levels, although there were reports of stronger demand related to apartment construction and business remodeling. Outlooks were generally more optimistic than in the last report, with contacts expecting some improvement this year.

Respondents in high-tech manufacturing said demand continued to grow at a moderate, sustainable pace since the last report. Contacts noted that production was at high capacity and inventories had increased from very lean to desired levels. Several firms said they had added slightly to payrolls. Areas of strength included smart phones and gaming consoles, while demand for computers was reported as "bouncing along the bottom." Most respondents expect growth to continue at a moderate pace for the next three to six months.

Responses from paper producers were mixed, but overall demand remains at low levels. Most expect conditions to remain stable as the economy slowly recovers. Food manufacturers noted improved sales during the reporting period. Transportation manufacturers also noted an increase in demand, and outlooks are for modest growth in 2011.

Petrochemical producers noted strong domestic and export demand, except for construction-related materials. North American producers of natural-gas based resins and plastics continue to enjoy significant advantages in export markets.

Demand for oil products continued to improve against normal seasonal trends. Refinery utilization rates moved up to the highest December levels since 2007. Margins held steady, despite the surge in the price of crude oil. Suppliers reported that refiners' confidence has improved.

Contacts expect to finish 2010 on a positive note with holiday sales exceeding year-ago levels and outlooks improving modestly. Inventories are at desired levels and in-line with seasonal norms. Two large retailers noted that their sales in the District outperformed those nationwide during the reporting period, but the gap is expected to narrow. The outlook for 2011 remains muted and contacts expect demand to remain flat or grow modestly at best.

Automobile sales held steady over the reporting period, and 2010 sales should show a solid increase over 2009 levels. Contacts expected sales to be strong the final week of December. Inventories rose modestly but are in the desired range. The outlook for 2011 is for continued gradual improvement.

Staffing firms reported demand held steady at high levels. Strength remains broad-based, with particularly strong demand for workers with expertise in the professional, technical, healthcare and finance fields. Contacts noted that call centers were becoming a new source of strength. As in the last report, contacts said direct-hire activity was picking up. All contacts had positive outlooks and expect continued strength in 2011.

Accounting firms noted seasonal slowness, with demand about even with the year-ago level. Contacts expect a reasonably good year in 2011 but noted demand is unlikely to pick up substantially until clarity is reached on some public and fiscal policy issues. Legal contacts noted an uptick in demand for services--primarily corporate merger and acquisitions and real-estate services. Demand overall was characterized as soft, but improving.

Reports from transportation services contacts were mixed, but mostly positive. Railroad contacts noted business is much better than this time last year and were optimistic in their outlooks. Shipping and intermodal contacts said volumes were up from year-ago levels. Airlines reported continued steady demand. Most contacts in the transportation services industry expect modest to moderate growth this year. However, one intermodal shipping contact said higher input costs had dampened his outlook.

Real Estate and Construction
The housing market remained weak since the last report. Sales were sluggish at low levels, according to contacts. Homebuilding activity continues to bounce along the bottom. Contacts are cautious in their outlooks but are hopeful that job growth will translate into increased sales this year.

Office and industrial leasing activity is spotty but appears to be moving in a positive direction, according to respondents. Commercial construction activity overall remained weak, despite increases in multifamily and hospital construction activity.

Financial Services
Financial firms reported soft loan demand overall. National institutions noted some pickup in consumer and industrial loan demand, but regional banks reported no change. Commercial real estate lending was weak, with the exception of multifamily. The residential mortgage market was reported as "spotty" across the state, but unchanged overall. Contacts said loan pricing is increasingly competitive. Outlooks remain cautious though more optimistic, and contacts expect to see an uptick in mergers and acquisitions of small banks this year due to the increased cost of regulatory compliance.

Drilling activity remains high. Crude pricing is strong, and margins are good. Growth in the rig count has slowed due to the continued shift away from dry gas toward more oil-directed drilling, natural gas formations rich in associated oil or natural-gas liquids. The liquid-rich Permian basin and Eagle Ford shale areas in South Texas are booming.

Drought conditions became prevalent in the District in December, with more than 85 percent of Texas classified as abnormally dry or worse. Ranchers felt the immediate impact of the drought, as poor pasture and range conditions necessitated costly supplemental feeding for livestock. Dry land winter wheat was in need of rainfall, and 2011 crops could be adversely affected if soil moisture levels remain low going into spring planting. Demand for agricultural commodities remained above average, and export activity continued to rise for cotton, beef and grains. Prices were strong for most crops, with cotton, wheat and corn prices increasing further. The overall outlook for demand and prices for agricultural commodities is very optimistic.

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Last update: January 12, 2011