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Federal Reserve Districts

Eleventh District--Dallas

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Most contacts in the Eleventh District reported steady, moderate economic growth in June and early July. The main exception was home builders, who reported a steeper decline in demand. Most contacts reported increased concern about price pressures and uncertainty about the national outlook. Rising prices for energy and transportation were reported as boosting costs for a wide range of industries and were said to be likely to lead to future increases in final product prices.

Continued increases in energy and commodity prices are negatively affecting a wide range of industries. Many producers report that profit margins have been squeezed and that productivity gains are no longer sufficient to hold off product price increases. Because existing price contracts and many retailers require up to six months notice of price increases, many firms report that they plan to raise prices significantly in the second half of this year.

Since early June, light sweet crude prices have been fluctuating while setting record highs. Natural gas prices have also been high and volatile. Natural gas inventories are well below the inflated levels of last year. Futures prices for distillates (heating oil and diesel), spot gasoline, and oil- and natural gas-based chemicals have also increased sharply over the past six weeks.

Labor Market
The labor market remained relatively tight, but most respondents reported flat to only slightly increasing payrolls. Respondents in slumping industries, such as those tied to construction of single-family homes, reported some reductions in hours worked and making some job cuts through attrition. Many respondents continued to report difficulty hiring skilled workers such as engineers, mechanics and certain administrative personnel. Overall wage pressures remain mild, but respondents reported an increasing number of workers asking for cost-of-living increases. One respondent also noted that the upcoming increase in the minimum wage will significantly increase the firm's wage costs.

Producers of materials used in home construction-such as brick, stone and lumber--reported continued weak conditions. Several construction-related manufacturing respondents reported larger than desired inventories and said that they are reducing production to bring inventories down. Although overall lumber prices are falling, some lumber producers in the District report that rising energy, freight and import costs have led them to increase prices.

Although still solid and above year-ago levels, demand for commercial construction materials continued to soften and is expected to weaken steadily. Respondents in fabricated metal production said that demand was flat to slightly down, that backlogs are decreasing and that new orders and expectations of declining nonresidential building suggest further weakening. Primary metal producers report that sales have been flat to slightly down while costs have shot up. One contact reported that his natural gas bill increased 100 percent over a year ago.

High-tech manufacturers reported continued moderate sales growth. Firms selling products outside the U.S. with most inputs priced in dollars are performing well. Semiconductors are seeing upward pressure on prices, although a recent effort to raise prices did not stick. Demand was reported as steady for communication devices. Sales to Asia remained strong but were weak in the U.S. and Western Europe.

Demand in the food products industry has been moderate with contacts reporting some recent improvement in sales growth. While demand from restaurants has slowed slightly, a pickup in retail demand has more than offset the slowing. High food prices continue to be a major concern, and manufacturers of processed food report that they have not yet been able to pass along all of the increases. Specialty transportation manufacturers such as aircraft parts and emergency vehicles say that sales remain solid and their outlook is positive. Oil-based ethylene producers are operating at relatively low rates, while those that use natural gas are enjoying large cost advantages and operating full out. Meanwhile, demand for polyethylene is strong because weak domestic sales have been offset by strong exports.

Retail Sales
Retail sales were mixed--with discount stores reporting stronger sales and other retailers reporting flat to slightly declining sales. Transportation costs and prices of commodity-based products and imported goods continue to rise, squeezing profit margins. Inventories were reported at desired levels, and employment was up for firms with new stores but down for individual store locations. One contact reported that accounts past due have increased recently. Most retailers said that their outlook for the remainder of the year is grim because consumer budgets are tight and the economy is weak.

Auto dealers reported mixed demand. The switch to small, fuel efficient cars has continued and has led to a shortage of such vehicles. Consumers are paying sticker prices for some small cars while domestic auto producers are offering rebates and large discounts, especially on trucks.

Demand for temporary staffing services picked up slightly over the past six weeks. Orders were strongest for professional and technical workers in IT, accounting, energy and engineering services. Demand for entry-level clerical work remained weak, but demand for HR professionals and manufacturing workers edged up. One contact noted that the labor market in Texas is doing much better than in other parts of the country.

Demand for legal services continued to grow moderately, with most of the growth concentrated in litigation and bankruptcy. With the exception of continued strength in oil and gas, legal services to support transactions have declined. Demand for accounting services remained modest.

Trucking companies reported reduced shipping volumes in the last month. Import volumes have declined and are not being completely offset by exports. Record fuel prices, along with price increases in almost every area of operations are having a major impact on the industry. Railroad cargo volumes have been steady over the last 30 days. Rail shipments of residential construction materials continued on a downward trend and those of nonresidential building materials were only up slightly. Rail shipments of primary forest material--a leading indicator for residential construction-have edged up over the last four weeks. Shipments of motor vehicles fell sharply.

Airline demand has not changed much since the last survey. In response to rising jet fuel prices, airlines are reducing capacity, laying-off workers, and increasing fares.

Construction and Real Estate
Homebuilders said that traffic and sales weakened fairly significantly in June, following weak but steady demand earlier in the spring. As a result, the pace of single-family building activity has declined at a rapid pace. Contacts said a number of factors--such as a weak stock market and higher gasoline and food prices--have weakened demand. On a more positive note, inventories of unsold homes continued to decline, especially at the lower end, and prices were holding up. There was some concern, however, about the large inventory of vacant lots and reduced funds for real estate lending.

Respondents say that nonresidential construction activity is beginning to slow and there are signs that activity may decline further. Commercial real estate respondents noted a continued decline in investment deals getting done, particularly for larger projects. There were reports of a general drying up of liquidity in the market and a flight of capital out of real estate. On the upside, higher quality assets did not see a major deterioration in value. Industrial and office leasing continued to weaken.

Financial Services
Financial services contacts reported that although there has been no significant decline in credit quality, they expect deterioration in coming months. In particular, the quality of mortgage and consumer loans is a concern as home prices soften and consumer budgets are strained. Contacts say that the increased cost of capital has induced them to widen loan interest rate spreads and to tighten non price terms of credit. Competition for deposits is very tough, and lenders are turning to other sources of liquidity. Commercial lending activity remains fairly solid.

Rising energy prices have pushed oil and natural gas drilling sharply higher in recent months. Land-based drilling directed to unconventional sources of natural gas has seen the largest gains. Drilling companies are adding jobs but report having difficulty finding workers with the skills they need.

Recent rains have provided some relief in most parts of the District suffering from drought-like conditions. Crop prices continue to be favorable and are helping offset high fuel, fertilizer and other production expenses to some degree. High feed costs and low hay and corn feed supplies have weakened prices for stocker cattle and are hurting livestock producers.

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Last update: July 23, 2008