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Federal Reserve Districts

Eleventh District - Dallas

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In September and early October, Eleventh District economic activity remained at roughly the same level reported in August. Many industries continued to report problems hiring, and some prices were higher. Manufacturing activity was mostly unchanged at a high level. Demand for business services continued to increase strongly, but retail sales growth was slower than expected. Bankers reported little change in lending. Construction activity continued to grow moderately, while energy activity remained extremely strong. Cotton farmers expect an excellent crop, and livestock conditions remained good.

Rail shipping delays caused headaches for some manufacturers, particularly in Houston and for chemicals, steel, lumber, cement and brick. Several firms shifted shipments to trucks and, for the most part, delays have not caused production problems. Stiff competition or long-term contracts are preventing many companies from passing higher shipping costs on to selling prices. Contacts expect the situation to improve by the first quarter of 1998.

Hiring problems continued to be reported in most industries, and wages were up at some firms. All retailers noted difficulty finding workers and many had increased wages. Many business services firms said sales growth had slowed because they did not have enough labor resources to meet increasing demand. One accounting respondent, for example, said the firm was turning away lower valued business from non-profits and small government entities. Another respondent had recently turned away $50 million in audit work. Salary increases in the service sector were reported to be larger than earlier this year, and contacts suggest that they are passing along more of this rising cost in higher fees. Electronics firms continued to report that a high percentage of their job openings remain unfilled, but they continue to resist increasing wages to attract more workers because, as one respondent noted, competitive pressures in the industry do not allow wage increases of more than an average of about 3 percent. A shortage of skilled construction workers pushed up their wages.

Several industries reported higher selling prices. Selling prices and rental rates were up for many types of properties, particularly for office space, with year-over-year office rents increasing between 8 percent and double digits in some markets. Energy prices remained higher than expected. Oil prices spent most of August and September between $19.25 and $19.75 per barrel, but jumped to near $22 per barrel on October 3�the highest level since February�as President Clinton dispatched an aircraft carrier to enforce the no-fly zone over southern Iraq. Natural gas prices have been over $2.30 per Mcf since early August and strengthened by the end of September to over $3.00. Natural gas inventories have been 3 percent to 4 percent above last year but below normal, and contacts suggest that production is down, especially from the Gulf of Mexico. Petrochemical prices continue to weaken, however, due to large capacity additions both in the U.S. and Asia.

Manufacturing activity remained mostly unchanged at a high level. Demand for construction-related manufactured products was continued at roughly the same level overall. Demand was up for semiconductors, although declines in memory chip prices have resulted in flattened revenues for several respondents. Demand has increased for low-cost microprocessors due to increased demand for personal computers in the $1,000 price range. To take advantage of strong margins in late summer, the U.S. refinery system maintained record levels of output in September. The summer driving season seemed reluctant to end, as good weather and a strong economy kept gasoline demand extremely high. Inventories for gasoline are now relatively low. As a by-product, the record levels of gasoline production over the summer led to unusual amounts of heating oil being made. As a result, heating oil inventories are 20 percent above normal for this time of year. Demand for petrochemicals remains very strong.

Demand continued to increase strongly for business services, such as temporary staffing, accounting and legal, and all respondents had a very positive outlook for the coming months. Demand was especially strong for transactions related to mergers, acquisitions and initial public offerings in the energy and high-technology sectors. The transportation industry reports that a strong economy has led to strong demand, particularly for trucking and air cargo.

Retail Sales
Sales growth was slower than expected in September, but picked up some in October. Most contacts were not concerned about the dip in sales growth and remained optimistic about the outlook for future sales. Retailers reported no change in list selling prices, but said that there may be fewer markdowns and less discounting.

Financial Services
Bankers reported little change in lending activity since the last survey. Mortgage lending slowed, seasonally, as expected but remained strong. Contacts said that lower long term rates reduced the spread on consumer and mortgage lending rates, but noted that delinquency rates remain low. Several respondents in the Dallas region mentioned very strong deposit growth year-to-date.

Construction and Real Estate
Construction activity continued to grow moderately. Office construction increased at a strong pace and, while there has been an increase in speculative office construction, most contacts are not yet concerned about overbuilding. Demand for industrial space picked up, but new supply is expected to outpace demand by year-end in some areas of the district, causing a slight drop in occupancy rates. Residential real estate was boosted by stronger than expected demand.

Demand for oil services and machinery remained extremely strong. Oil-related equipment such as rigs, drill pipe, supply boats, etc, remain in short supply, and prices are rising. People are cited as the biggest constraint on activity. Blue-collar skills such as welders and machinists remain at a premium but also geophysicists and "managerial skills to assess and carry out a project." Prices for equipment are rising rapidly to levels not seen since the early 1980s, but are still often too low to justify new capacity. Contacts say that the result is no new capacity, and cash flows mostly used for consolidation as competitors buy each other's capacity.

Cotton farmers expect an excellent crop, and livestock conditions remained good. Farmers and ranchers received much needed rain in early October. Very heavy rains caused flooding, soil erosion and stalled harvest operations in some regions, but helped small grains and winter pastures across the district. Supplemental feeding activity continued, but was decreasing as pastures improved.

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Last update: October 29, 1997