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In December and early January, Eleventh District economic activity continued to expand at the slightly stronger pace established in late October and November. There were more reports of price pressures than in the last Beige Book, partly as a result of low inventory. Two industries reported that price pressures were less because new capacity had come on line. Most manufacturing activity was in a seasonal lull, with the exception of energy-related activity, which was strong. Retailers were happy but not overwhelmed with holiday sales. The financial services industry reported little change in lending, and construction and real estate activity continued at roughly the same level. High energy prices kept drilling and oil services activity strong. Agricultural producers reported generally good conditions but would like more rain.
Prices
Prices were up for aluminum, brick, scrap metal, retail goods, heating fuel and oil service companies. Retailers said holiday selling prices were up one to two tenths of a percent above last year, and one contact said the company is "trying to get margins back to historical levels." Low inventories of heating fuels and bitterly cold weather in Europe and the U.S. sent fuel prices soaring in December. Heavy demand for oil service companies pushed their selling prices to a premium. Oil service firms reported a shortage of some skilled workers, such as machinists, as well as many kinds of equipment, from offshore rigs to measurement-while-drilling equipment. A shortage of scrap metal pushed prices up 5 percent over the last 30 days, and contacts expect prices to increase an additional 3 percent over the next quarter. Rising costs are expected to push up prices of corrugated box and liner board by 6-10 percent in February or March. A slight softening of chemical prices, combined with a run-up in natural gas and liquids prices, has squeezed profits for petrochemical producers. Some softening in the price of prefab steel building components was attributed to seasonal factors and additional capacity. Cement producers said a new terminal at the Port of Houston had increased supply sufficiently to hold prices steady.
Manufacturing
Manufacturing activity was in a seasonal lull, with the exception of computers and semiconductors, which continued to rebound, and energy-related activity, which remained strong. Demand had slowed, seasonally, for boxes and construction-related materials, such as fabricated metals, brick, lumber and concrete. An increase in demand led to low inventories of steel and scrap metal. Most construction-related manufacturing contacts expect a good year, although as one said "it will be hard to top 1996." Very strong demand and high levels of production continue for petrochemical producers. Gulf Coast refineries have been operating at full capacity in an effort to meet demands from an inventory running 16 percent under year-ago levels, and to take advantage of high prices. Maintenance of refineries has been widely delayed to continue heating oil production, and the usual December turnarounds to begin the transition to summer gasoline production have not taken place. With gasoline inventories at the lowest levels in recent history, this now raises the possibility of very tight supplies of gasoline this summer.
Retail Sales
Most retailers were happy but not overwhelmed with holiday sales. Contacts referred to the period as "O.K," "not great," "solid," "decent" and an "obvious improvement." Retailers said Texas sales were generally better than those posted by the nation as a whole. Several contacts reported that inventories were slightly lower than expected, with the exception of one company with higher inventory who had restocked based on better-than-expected sales. Contacts expect sales to continue at roughly the same pace throughout the first half of 1997, with some strengthening towards the third quarter. Two contacts mentioned concern about the high levels of consumer debt. Auto sales have been slower than expected.
Financial Services
The industry has seen little change in lending activity over the last six weeks. Residential real estate and commercial loan demand continued at the same pace, except in Houston where increased construction and restoration of apartments pushed up commercial lending. Outlooks for the New Year remain cautiously optimistic for all loan types.
Construction and Real Estate
Activity continued at roughly the same level. Construction of industrial space was still strong, although demand had declined. Some contacts were concerned about the amount of supply coming on line, but others were optimistic that announced relocations would spur an increase in demand in 1997. Residential demand remained steady at high levels, and existing home sales were reportedly up in most major markets, with the exception of Austin, where demand has softened. In the office sector, contacts said demand for space continued to improve, and rising occupancies are expected to continue pushing up rents in 1997, boosting office construction.
Energy
Oil services companies continue to report very strong demand and full utilization of capacity. There was no sign of the usual end-of-year build-up in the U.S. rig count, which held steady between 840 and 860 for the last six weeks of 1996. These levels are the highest of the year, suggesting industry capacity is maxed out. A substantial increase in capital spending by producers is predicted for 1997, at least 15 percent, but oil service capacity must grow for this to materialize, and much could be eaten up by higher prices for oil services. Any increased activity will have to be land drilling, because contacts say every offshore rig available in the world is working now.
Agriculture
Land preparations moved ahead in most areas. Many areas could use a good rain at this point. In December, cold temperatures led to losses of some vegetables, but citrus was spared any serious damage. A return to warmer conditions improved livestock performance, and haying activity slowed with the warmer temperatures. As this document was being completed, the effects of a deep freeze that hit the District are unclear.
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