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Federal Reserve Districts

Eleventh District--Dallas

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The Eleventh District economy expanded modestly in late July and August. Economic conditions were slightly softer than reported in the last survey. Despite weakness in some sectors, businesses with national sales say demand remains better in Texas than elsewhere in the country. Most contacts said higher costs continue to impact profitability. Many expressed concern about the health of the national economy and current financial conditions.

Elevated energy and commodity prices continue to significantly impact most industries in the District. Many contacts said higher costs were being passed through to selling prices. Several contacts were instituting or raising surcharges to cover transportation costs. There were reports of softer prices for some commodities including steel, aluminum and grain, but contacts did not expect much relief in the near-term.

After peaking at an all-time high in mid-July, oil prices retreated in recent weeks but remain elevated compared to a year ago. Oil product prices, such as gasoline, diesel and heating oil, fell in tandem with crude oil. The price of natural gas also declined to its lowest level since February. Natural gas inventories are near their 5-year average but are below the high levels seen last year. Prices for some petrochemicals, including ethylene and propylene fell along with energy prices, but plastics prices held steady and industry contacts noted they remain behind the curve in passing through previous energy increases.

Labor Market
The labor market remained relatively tight and most contacts reported flat to moderate hiring. Shortages remain prevalent for skilled workers in oil and gas related professions. Wage pressures were mild overall, but there were reports that companies were fielding more requests for higher wages. Some firms were eliminating overtime or reducing hours to help manage payroll costs.

Demand for materials to supply residential construction remained weak, and bookings were lackluster. Inventory levels have fallen in response to a ramp down in production. Fabricated metal producers that supply commercial construction said demand was down considerably, driven by continued trouble in credit markets. One contact noted the falloff was "like the faucet shut off". Primary metals producers noted slower to flat demand, and some contacts said their customers were reducing inventory. Outlooks were somewhat more cautious. Costs of construction continue to rise, and lending conditions have become much stricter. Despite the more difficult environment, contacts said the Texas construction market remains in better shape than most other areas of the country.

Respondents in high-tech manufacturing report flat to slightly lower sales since the last survey, with most describing the pace of growth as weak to moderate. One contact noted a recent softening of demand in Asia which had previously maintained a strong pace. Inventory levels were mixed. Expectations have diminished. Contacts said they had expected demand to improve in the third quarter but now expect weakness through year-end.

Food product sales remain near year-ago levels and the outlook is positive, despite higher costs for input prices such as corn and milk. Contacts are optimistic about the back-to-school season and expect new snack products to generate demand through the rest of the year. Activity remained steady for specialized transportation equipment, such as ambulances and aircraft parts. Automotive manufacturers said demand continued to fall--particularly for vehicles with low fuel economy--and there are reports of temporary plant shutdowns. Sales of corrugated packaging remained sluggish.

Demand for gasoline, diesel, and other oil products weakened and refiners cut production. Contacts said refining margins fell sharply as the decline in product prices was faster than the decline in crude prices. Contacts reported softer demand for petrochemical products as domestic sales remained weak and exports slowed, partly due to Olympics-related production cutbacks in China and the August vacation period in Europe.

Retail Sales
Retail demand was largely unchanged from the last survey, with mixed reports from contacts. Discount retailers noted strength in sales, although the pace of growth was less robust than a year earlier. Traditional department store sales remained tepid at below year-ago levels. Sales of discretionary items, such as electronics, jewelry and housewares weakened. Retailer outlooks remained pessimistic overall, even though Texas sales appear to be holding up better than in many other areas of the country. Respondents that extend credit expect conditions to worsen in the near-term.

Automobile sales remained weak, and most contacts expect no improvement until early next year. Inventory levels improved as manufacturers reduced production and dealers cut prices.

Growth in orders for temporary staffing services leveled off following a slight uptick in the previous survey. Contacts noted clients were cautious to hire because of a slower national economy, rising costs and upcoming elections. Still, demand for skilled professional and technical workers remained strong, especially in the oil and gas industry. Outlooks were generally positive, but many noted concern about the health of the overall economy.

Legal firms said bankruptcy and litigation work continued to shore up activity. Transactional work was down overall, although demand from the oil and gas industry remained strong. Real estate-related demand was weak. Contacts in accounting services reported steady, moderate demand.

Elevated fuel costs continue to hamper the transportation services industry. Intermodal cargo volume remained steady, but was well below year-ago levels. Respondents noted international demand has shifted the client composition to favor exporting. Railroad industry contacts said volumes were up slightly for metals, coal and chemicals, although the transportation cost of such materials was of great concern. Airlines continue to be negatively impacted by high jet fuel costs. Despite the recent reprieve in energy prices, airline contacts are maintaining their business models and will go ahead with announced capacity cuts.

Construction and Real Estate
Sales of new and existing homes remain slow and buyers are extremely cautious, according to contacts. Homebuilders continue to cut back on starts, and new home inventories are edging down. Sales incentives are prevalent on completed homes, but overall, prices are holding up relatively well in both the new and existing markets. The lending environment is a major concern. Several respondents said lending standards had over-corrected, making it difficult for some credit-worthy buyers to obtain mortgages. Contacts in the multifamily sector noted increased concern about apartment overbuilding across the District.

Office leasing activity remained positive but the pace was slower. Contacts noted that even as vacancies tick up, an expected decline in office construction should keep market fundamentals balanced. Overall, commercial construction activity remains relatively strong due to projects currently in the pipeline and elevated public sector construction, although many contacts expect a slowdown next year. Commercial real estate sales activity was subdued as investment capital remained scarce.

Financial Services
Eleventh District financial services contacts report relatively satisfactory conditions despite the uncertain national financial environment. Credit quality continues to hold up, although contacts still expect to see some deterioration in the near term. Lending standards remain tight and lenders are reportedly evaluating each borrower and deal with heightened scrutiny. Several contacts noted stiffer guidelines from regulators.

Competition for deposits remains high, and contacts continue to pursue other sources of liquidity. Elevated capital costs continue to pressure lenders to increase interest rate spreads. Loan demand remained soft for automobiles and single-family mortgages but commercial lending was fairly solid. Lending was reportedly strong for new multifamily development.

Automotive industry contacts reported that several lenders had exited the auto lending business and the ones that remained had become more stringent.

Despite a recent fallback, oil and natural gas prices remain at elevated levels compared to a year ago. The decline in prices over the past several weeks is attributed, in part, to weaker U.S. and global economies. The domestic rig count continued to rise, adding 79 rigs over the past six weeks. Much of the additional drilling activity is land-based natural gas activity in the Barnett and Haynesville shale. According to contacts, current prices remain profitable, and there are no indications of cuts in production.

Rain improved soil moisture conditions in a few areas, but drought continues to stress crops across much of the District. Hurricane Dolly wiped out cotton and sorghum acreage in the Rio Grande Valley adding to crop losses. Livestock operators culled their herds at a higher-than-normal rate due to elevated feed costs and poor pasture conditions. Dairy farmers said high demand for products and a recent reprieve in grain prices had led to better conditions.

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Last update: October 1, 2008