Eleventh District economic activity strengthened from late May to early July,
driven by strong construction- and energy-related activity. Many contacts expressed
increased optimism about the economic outlook, noting surprise that activity
had strengthened more than they had expected. Manufacturing and service sector
activity was up. Retail sales increased. Contacts say real estate investment
is very strong. There has been a pickup in all types of construction and real
estate activity, leading to a very hot housing market and construction of speculative
office space in the Dallas area. The financial sector continued to report solid
loan growth and good credit quality. Hot, dry weather hurt agricultural conditions.
Energy prices were higher than during the last survey period. Strong demand
pushed up crude oil prices. Pump prices for gasoline and diesel fuel were also
higher. Exceptionally strong demand for diesel raised concern about the refinery
system's ability to build inventories for next winter. Natural gas prices have
risen along with crude prices, helped by warmer-than-normal temperatures in
the South. Despite high temperatures, natural gas inventories remained 12 percent
above normal for this time of year. Refinery margins on the Gulf Coast remained
very strong throughout June, about the same as May and better than $3.50 per
barrel higher than last June. Prices for energy services were sharply higher.
Most contacts expressed concerns about rising freight, fuel and utility costs.
Transportation firms said they are passing these costs on to customers as much
as possible, and even airlines have been able to raise fares. The ability of
manufacturers and retailers to push through price increases remained mixed,
Strong demand pushed up prices for cement and most other construction-related
materials. Selling prices were lower for scrap steel, nickel, and aluminum.
Excess inventory led to price declines for a variety of basic chemical and plastics
products, but increased orders and unplanned outages were helping inventories
adjust and prices stabilize.
The labor market continued to strengthen, with more reports of hiring, employees
being bid away and scattered problems hiring skilled workers. Only a few industries
noted any significant wage pressures, notably accounting firms and the energy
Manufacturing activity increased, with very strong demand for most construction-related
and energy-related manufactured products. Very strong demand for cement has
led to shortages in Texas, and inventories are rapidly depleting--despite manufacturing
plants working at capacity. Some producers said they imported cement from abroad
to keep up with demand. Producers of clay, brick and glass continued to report
robust demand. Demand for fabricated metals has been good and steadily improving,
spurred by particularly strong sales for highway and commercial construction.
Demand for lumber was above last year's pace.
Respondents in high-tech manufacturing said sales and orders continued to
grow at healthy rates since the last survey. Industrial demand for semiconductors
has picked up in the past six weeks. Apparel producers say demand has been decreasing
due to import competition, which has resulted in another plant closure. Sales
of primary metals have cooled from very strong growth earlier this year, and
producers continued to report increased import competition. Inventories are
higher than desired for some metals but are being pared down.
Chemical producers continued to struggle through a patch of weak demand. Sales
to Asia have slowed. There was some improvement in orders in late June, which
contacts said was an early indication that demand was stabilizing. Refinery
capacity utilization averaged rates near 98 percent in the District, higher
than the U.S. average.
Activity in the service sector picked up slightly. Temporary staffing firms
said demand edged up over the past six weeks. Transportation firms also reported
an increase in demand. Legal firms reported no change in demand. Demand continues
to be strong in the accounting sector, keeping pace with last year's strong
Retailers report that sales growth has been stronger than expected, and early
signals suggest a healthy back-to-school season. Contacts thought high oil and
gasoline prices would restrain growth, but reported that consumers have kept
spending, and there has been no deterioration in bad debt portfolios. Auto dealers
also reported a pick up in sales growth. Contacts noted some uncertainty because
they said sales were being stimulated by manufacturer price reductions, and
the underlying market is not strong.
Construction and Real Estate
Contacts say real estate investment is extremely high in part because the District's
competitively-priced markets are attracting investment capital from more expensive
coastal markets. Construction of new homes picked up over the past six weeks.
Demand is strong, and sales are ahead of this time last year. With few regulatory
or land development constraints, the supply of new homes has been sufficient
to meet demand, and prices are not increasing faster than inflation. Existing
home sales in major metropolitan areas remained above last year's record levels,
but sales growth was less robust than earlier this year and some contacts expressed
concerns about rising inventories.
Demand for apartments rose over the past six weeks. Contacts noted an upturn
in market conditions with occupancies tightening in Dallas and Austin, and rents
rising modestly. Apartment construction continued to be at high levels in Dallas, Houston and
San Antonio, and developers remained optimistic that conditions will continue
to improve. Several high-end condo and town-home projects are slated to break
ground in Dallas, and contacts noted that most are at least 60 to 70 percent
Office markets also continued to improve. Occupancy rates increased, although
they are still low in comparison with other parts of the country. Contacts say
rents are "firm" to "rising." There is limited office construction activity
in Houston and Austin, but speculative space is being developed in the Dallas
area. Industrial activity is also picking up, especially near the Port of Houston.
Hotel markets are "hot."
Loan growth remained solid, according to contacts, who said
that there has been a pickup in consumer auto loans as a result of an increase
in purchase incentives. Credit quality was still good. The banking environment
is very competitive, they said, particularly for large, commercial loans.
Drilling activity continued to expand. The rig count increased, and contacts
say the outlook for future drilling activity has picked up. Oil service companies
reported extremely strong demand, limited capacity, and strong pricing power.
Service firms say they are turning down work and have expressed more willingness
to expand capacity, given current pricing and the potential durability of this
drilling cycle. Expanding manufacturing capacity for oil field equipment poses
few barriers, but finding qualified engineers and training crews is difficult
and time consuming. Technical skills will increasingly have to be found abroad,
Dry weather has reduced yields and increased the cost of production. Irrigated
land crops remained in fair condition but the outlook for dry land crop yields
worsened. Range and pasture conditions also deteriorated substantially since
the last report, and hay production has been very limited. Corn producers expressed
concern about aflatoxin.