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Federal Reserve Districts

Eleventh District - Dallas

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Eleventh District economic activity expanded at a slightly slower rate in late October and early November. Although respondents remained optimistic about the coming months, some voiced concerns about future Asian demand. Those surveyed reported more wage increases and continued difficulties in hiring. A few manufacturing sectors reported slower growth. Business services and construction expanded, while loan demand remained stable. Recent rainfall improved agricultural conditions, but more rain is needed.

More respondents reported wage increases than in the last survey, with greater use of incentive bonuses. Salary increases at some real estate firms were more than 15 percent during 1997, and respondents expect about another 5 percent next year. One contact reported paying secretaries $5,000 in monthly incentive bonuses.

Passenger fares, business and telecommunication service fees, and prices for paper and packaging all increased. Construction costs were up slightly, due to increases in wages and prices for brick, fabricated steel and some lumber products. Prices for scrap metal, freight service and cement remained unchanged. Contacts reported downward price pressure in the apparel industry due to international competition. Prices softened for some petrochemical products, and more declines are expected. Unseasonably cold weather, delays in coal shipments by rail, and natural gas production problems in the Gulf of Mexico pushed natural gas prices upward sharply. Increased demand for heating oil had little effect on its price because inventories were high. Crude oil prices were somewhat volatile during the tensions with Iraq. Memory chip manufacturers reported that increased industry capacity and customer inventory reductions combined to depress prices.

Sales slowed in electronics and apparel, while demand continued to grow at the same rate in most other sectors. Sales of semiconductors and other electronic components grew more slowly as uncertainty about international demand, particularly in Asia, caused customers to trim inventories. Shipments of apparel products are flat to down. Refining margins and capacity utilization continued to fall due to a seasonal decline, which was exacerbated by higher than normal heating oil inventories. Telecommunications manufacturers reported continued slow growth of sales and cautious optimism for the coming months, particularly for U.S., European and Latin American markets. They revised downward expectations for growth in Asian markets. Sales of paper products were down seasonally, but above year-earlier levels. Production of petrochemical products remained strong, but contacts expressed concerns that weakening Asian demand would stimulate exports to the United States. Sales of commercial construction-related products increased over the past six weeks, but demand for residential construction-related products softened seasonally. Both remain above year-earlier levels. Strong demand for commercial construction products caused steel mills to ration wide-flanged steel beams.

Demand for temporary staffing, accounting, consulting and legal services continued to increase, and respondents were optimistic about 1998, but they also reported being unable meet increasing demand because labor market tightness constrained their hiring. Legal and accounting services were stimulated by growth in initial public offerings, mergers, and acquisitions. Although the use of transportation services slowed seasonally over the past six weeks, contacts reported stronger market conditions than a year earlier, particularly for passenger travel and hi-tech freight. Shippers reported no significant improvement in rail bottlenecks.

Retail Sales
Retailers reported good sales growth throughout most of the district, with booming sales growth in Houston. Contacts expect a good holiday season. The strong dollar has lowered import prices and softened upward pressure on selling prices. Prices for some imported goods are expected to continue to fall in coming months.

Financial Services
Bankers reported steady loan demand over the past six weeks, with strong competition continuing in commercial lending. Credit unions reported a slowing in auto loans, but expect them to pick up in the first quarter. Loan rates are stable, with the exception of slight declines in auto and mortgage rates. Credit unions reported that credit quality remains high.

Construction and Real Estate
Construction activity increased in the past six weeks, driven by increases in office and residential construction. Residential and commercial real estate activity was also very strong. Office rents increased, although at a slightly slower pace and vacancy rates declined further with continued strong absorption. Existing home prices have risen as construction and land costs have pushed up new home prices. Nonetheless, average and median prices for new homes have fallen slightly as the result of increased sales of lower priced "starter" homes. Contacts reported that in general, new home prices have increased over the past year only by as much as the five percent increase in construction costs. Inventories of new homes are slightly low.

Activity in oil services and machinery remains unchanged at extremely high levels. Strong demand cannot be met by existing capacity in the oil field services industry, and work is being rationed to customers as backlogs continue to build. Shortages of pipe, casing, and basic equipment were widely cited. Although there is still a general reluctance to expand capacity throughout the industry, shortages of skilled workers--such as engineers, welders, machinists and electronic technicians--pose difficulties for those who try.

Producers have nearly completed the cotton harvest and reports suggest that the crop is good. Recent rainfall was beneficial to winter pastures and small grains, but contacts indicated more rain is needed, as many wheat fields and pastures are reported to be in poor shape. Feeding of livestock increased in most areas, but winter pastures have responded favorably to cooler, wet conditions. The livestock sector remained in mostly fair to good condition.

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Last update: December 3, 1997