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Federal Reserve Districts

Eleventh District--Dallas

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Economic activity in the Eleventh District firmed somewhat over the past six weeks, with contacts in several industries suggesting a pickup in demand. Despite the slight improvement, several contacts expressed disappointment that conditions had not improved more. While outlooks are less gloomy than earlier in the year, most contacts are hesitant to predict a significant turnaround in the near term.

Excess capacity in many industries kept a lid on price pressures. Most contacts said prices were holding steady although a few noted continued declines, as firms make concessions in order to get business. Raw materials prices were mostly stable, but contacts noted higher fuel costs continue to squeeze margins. There were reports by metals producers and construction industry contacts that prices for steel and aluminum were ticking up.

Crude oil prices strengthened in late July and have remained near $70 per barrel since then. Gasoline prices rose by about 10 cents a gallon during the reporting period and diesel was up 15 cents per gallon. Natural gas prices moved up to over $4 per Mcf in early August but more recently fell under $3 per Mcf for the first time since 2002. Historically high inventory levels are putting downward pressure on natural gas prices.

Labor Market
Employment levels remained steady overall as most respondents have already right-sized their staff levels. Some said they prefer to work current employees overtime, rather than hire new workers, only to let them go if conditions worsen. Staffing firms noted a slight improvement in demand, and there were reports from high-tech and paper respondents that temporary hiring had edged up. In contrast, consolidation in the airline, residential construction and energy industries led to further reductions in headcounts. Wages remain unchanged and there are no signs of upward pressure. Firms continue to institute wage and hiring freezes, and there were additional reports of freezes on company 401(k) contributions.

Construction-related manufacturers said orders held steady at extremely low levels. A few respondents noted disappointment that prior expectations of recovery had not been met. There has been a sluggish start to the "shovel-ready" projects covered under the stimulus plan, and funding has been slow to materialize. Most contacts expressed uncertainty in their outlooks as both residential and commercial construction activity remain depressed, and there is little evidence that conditions will improve in the near-term.

Respondents in high-tech manufacturing said orders increased moderately since the last report. One respondent noted orders were stronger than expected because customers were no longer sharply paring back inventories. Another contact said demand for electronic components used in automobiles had increased at a strong pace. In general, respondents expect demand to continue to grow at a mild pace over the next three months, yet uncertainty remains prevalent.

Conditions in the paper industry were weak but stable. Several large box manufacturers said orders held steady over the past six weeks and were above levels seen at the beginning of the year. The exception was for producers that sell to the construction industry where demand remains quite poor. Food manufacturers noted a slight increase in the pace of sales in recent weeks, although the level of demand remains moderate. Transportation manufacturing contacts said weakness in the commercial airline industry kept demand for aircraft parts at low levels.

Petrochemical demand was mixed. Producers that sell to domestic manufacturing or auto-related markets cited an increase in demand, but manufactures of vinyl products such as PVC said domestic sales remained weak, despite some improvement in the housing market. Some producers said export demand from Europe and Asia was strong due to the cost advantage of domestic natural gas-based products over oil-based products. Refiners said demand for oil-based products rose since the last report but remains well below the peak in early 2008. Inventories for most products are high and refiners cut production slightly due to poor margins. Demand for energy-related products such as bits and drill pipe was weak and manufactures continue to operate facilities at very low capacity.

Retail Sales
Retailers report that consumers remain cautious, keeping overall sales flat at low levels. Value-based respondents noted sales were not as robust as expected given the back-to-school season. Texas-based department stores said August sales trailed the national average but strengthened during the state's "tax-free" weekend. While contacts say "things are up off the bottom," outlooks suggest it will be some time before we see a consumer-based rebound.

Auto dealers said demand was boosted by the cash-for-clunkers program, but they expect sales to drop back down to lower levels now that the program is over. The increase in sales drew down inventories, putting dealers in a better position. Several contacts noted a delay in receiving checks from the government and difficulty with the program's stringent paperwork.

Staffing firms report a broad-based uptick in contract activity but say that "it is nothing to get excited about," and demand for direct hires is still extremely slow. The pickup in orders for contract work has improved contacts' assessments of current conditions, but the outlook continues to be cautious. Demand for legal services held relatively flat at depressed levels with the exception of energy-related activity. Contacts in accounting services say demand is "muddling along," and apart from a seasonal uptick in early fall they do not expect improvement in the near term.

Demand for air travel remains weak but conditions have stabilized and the outlook is more optimistic than in previous reports. Small parcel shipping firms said a pickup in demand from the transportation and non-durable retail sectors led to positive growth in volumes, which they expect will continue through the third quarter. Container trade volumes rose in August, although the forecast is for a year-over-year decline in 2009. Railroads reported a modest, broad-based increase in shipments, and a rise in contract prospects has improved company outlooks.

Construction and Real Estate
Sales of low-to moderately-priced homes continued to improve over the past six weeks as buyers took advantage of the first-time homebuyer tax incentive. Sales of higher priced homes and condos remained slow according contacts. New home construction ticked up, but some respondents said it was more related to inventory replacement than sustainable improvement in demand, as builders had depleted most of their standing inventory during the downturn. Home values continue to hold up better in Texas than in many other areas of the country, and respondents were pleasantly surprised by recent figures that suggest prices may be firming. Despite some positive signs, contacts are hesitant to suggest a sustained recovery in the housing industry in the near term.

Commercial leasing activity remains sluggish. Some contacts said owners were offering early renewal of office and warehouse space, but tenants were hesitant to commit. Investment property sales are "dead in the water," although there were still reports of increased investor interest. Contacts continue to express concern about the large share of commercial real estate loans up for renewal, but for now lenders appear to be extending the loans. Commercial construction activity is at historically low levels, and many contacts said the stimulus funds were not expected to help much. Most contacts don't expect conditions to improve until 2011.

Financial Services
There were scattered reports of improvement in loan demand over the past six weeks, although contacts remain cautious about the future. Most respondents noted an uptick in residential mortgage demand, largely due to refinancing activity. Some contacts reported an increase in demand for auto loans, saying they were unsure how much of it was a result of the cash-for-clunkers program. Commercial real estate loans were the exception and continue to be mostly nonexistent. Credit quality continues to deteriorate. Mortgage bankruptcies remain high and consumer bankruptcies are rising. Lenders also expect more write-downs related to commercial real estate. Many contacts said they had seen a significant inflow in deposits over the past month.

Eleventh District drilling activity increased since the last report. Improvement in the rig count has been driven primarily by oil-directed drilling in response to rising oil prices. The pickup in the rig count is not enough to change the weak position of the energy industry, according to contacts. Low demand and rising inventories are putting downward pressure on natural gas prices. Companies are realigning activities and employment in areas where they won't need future capacity, including the Permian Basin, south Texas and the more mature Barnett shale. Drilling has slowed sharply in the Gulf of Mexico, including deep water drilling. There is growing pessimism in the outlook for the natural gas industry.

Reports on agricultural conditions were mixed. The severe drought in central and south Texas has wiped out large portions of dryland crops. Contacts say ranchers have liquidated as much of their cattle herds as they can and are now looking for ways to save what they have left. Milk prices remain below production costs leading to financial losses for dairy farmers. In contrast, favorable moisture and growing conditions in northern parts of the state have resulted in excellent crop yields. In particular, cotton yields are above year-ago levels.

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Last update: September 9, 2009