January 15, 2003 Federal Reserve Districts Eleventh District--Dallas

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Overall Eleventh District economic activity remained anemic from mid-November through early January. Demand was weak for most manufacturing and service firms. Construction activity continued to soften. Retailers were disappointed by holiday sales. Although there was a slight pickup in energy activity, the gains were substantially less than would have been expected given the sharp increases in energy prices. The financial services industry reported little change in activity, including no significant changes in delinquencies or charge-offs. Agricultural conditions also were largely unchanged. Respondents say that the uncertainty about war with Iraq continues to restrain business investment. Prices Price reports were mixed. Prices were up sharply for crude oil, natural gas, heating oil, gasoline, and residual fuel oil. Cold weather in the Northeast and Midwest spurred demand for energy while geopolitical forces reduced international supply. OPEC cut production ahead of the normal seasonal reductions, and a general strike in Venezuela halted all exports, including oil. In addition, contacts say the "war premium" has returned to energy prices. Natural gas inventories, which were at record levels in early November, are now 17 percent below the levels of last year and 5 percent below the five-year average. Crude oil inventories are 11 percent below the level of a year ago and declining. Outside energy, weak demand, and stiff competition is preventing higher energy costs from being passed along to consumers. Selling prices were unchanged for most manufactured products. The sharp increase in natural gas and oil prices has primarily come out of profit margins for petrochemicals, where product prices are stable or declining. Downstream plastic and synthetic rubber prices, all rising sharply throughout the first half of 2002, showed no significant changes in price in recent weeks. Prices for paper products have fallen since the last Beige Book, although this was expected to be partly offset by a decline in the price of some inputs, such as wood derivatives. Inventories are up for some construction-related products, such as cement and glass. While there were scattered reports of price increases in the service sector, airlines and retailers reported stiff competition and price declines. Retailers said that inventories are in good shape. Manufacturing Manufacturing activity continued to be weak in late November, December, and the first week of January. There was no improvement in energy-related manufacturing activity, while construction-related activity continued to soften. The high-tech industry shows signs of improvement, but contacts say the uncertainty surrounding war with Iraq is delaying business investment. Demand was unchanged for food products and primary metals. Apparel producers said demand was unchanged or a little slower than expected. Demand for paper products was better than expected, according to contacts, who said that while there has not been much change over the past month, sales have been higher than a year ago. Demand for construction-related manufactured products accelerated its decline over the past six weeks. Continued weakness in commercial construction along with reduced residential construction was blamed for the slowdown. Sales of lumber, wood products, stone, brick, and glass were below year-ago levels. Sales of fabricated metals were slightly above last year's levels, however, buoyed by construction of schools, hotels, and churches. Contacts in the high-tech manufacturing sector report that conditions remained flat to slightly improving. Business demand was weak, but consumer demand is increasing slightly. Inventories are reported to be very lean for producers and retailers. U.S. refinery utilization was up nationwide, but activity was down slightly along the Gulf Coast. Supplies to several Gulf Coast refineries are being impaired by the loss of crude oil from Venezuela, which forced a reduction in operations at some refineries. Other refiners have been able to buy enough crude oil on the spot market to maintain operations. There is no indication of improvement in demand for petrochemicals. Overcapacity remains a significant problem for some products, such as ethylene. Services Service sector activity remained weak. Accounting, legal, and temporary firms said demand was still slow. While there were some very slight signs of improvement over the past three months, contacts say global uncertainties lead them to be cautious. Demand for transportation services remained weak, although some airlines reported better than expected holiday traffic. Airlines continue to develop war contingency plans to analyze potential implications of war with Iraq, as well as risks resulting from recent bankruptcy filings by several major players. Cutting costs, improving efficiency, and fine-tuning existing capacity remain top priorities for airlines to return to profitability. After the bankruptcy filings, employees in the industry find themselves under intense pressure to provide wage concessions and boost productivity. Retail Sales Retailers said holiday sales were generally disappointing, with particularly poor sales of apparel and computers. Most contacts are less optimistic about the outlook for the first half of 2003, because of the war "wildcard" and because higher energy costs are expected to reduce consumer's disposable income. Auto sales remained weak, and contacts believe future growth prospects are poor. New car sales are expected to end the year roughly 8 percent below a year ago. Big incentives and zero-percent financing continue but are not having the same effect as earlier. Dealers say that some consumers seem to be anticipating price declines in the months ahead and are waiting instead of buying today. Financial Services Deposit activity remained strong, particularly at consumer-oriented institutions who have a large customer base. Contacts reported little change in loan activity and, as a result, loan-to-deposit ratios have shrunk for much of this year. Consumer lending continued to be the weakest category and account for a major portion of delinquencies and charge-offs. Real estate lending is still the strongest category, but auto lending slowed during the second half of the year. Commercial and industrial lending is flat to down for most contacts. Smaller banks have continued to outperform larger banks that have exposure to national financial market turmoil. Construction and Real Estate Activity continued to be at low levels in late November, December, and early January. Demand was still weak for home prices above $250,000. Lower priced homes sold briskly, according to contacts, who said the market was being stimulated by steep concessions from builders and low interest rates. Office markets were unchanged, and market contacts expect it will be at least two years before it improves. The industrial market also continues to be weak, although there were reports of pockets of strength. The multifamily segment in Austin and Dallas continues to suffer from lackluster leasing demand. Energy Energy activity increased only slightly despite sharply rising prices for both oil and natural gas. Producers increased short-term oil drilling and increased gas-directed drilling to take advantage of higher prices. There was little change in activity in the Gulf of Mexico, a more expensive and risky investment. Respondents say that improvement in domestic activity is now probably postponed to the second quarter of 2003. Agriculture Conditions remained largely unchanged since the last Beige Book. Moisture levels are generally favorable, although excess moisture impaired the harvest in some areas. Producers continue to rely on government payments to offset weak production revenue. Return to top Kansas City San Francisco