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Federal Reserve Districts

Eleventh District--Dallas

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Economic activity improved further in the Eleventh District over the past six weeks. Firms across a wide range of industries continued to report slight increases in demand. However, conditions in a few sectors, notably commercial real estate, financial services and construction-related manufacturing remained weak. Outlooks were generally more upbeat than last time.

Price pressures remained minimal across industries. Most contacts said prices were holding steady, although a few firms noted they were making concessions in order to get business. Raw material prices were mostly stable, but there were reports of an uptick in the cost of fiber and some industrial metals. Most firms that saw an uptick in raw material costs said they were unable to pass on these increases to customers.

Energy prices declined slightly from early January to mid-February. Crude oil prices trended downward from $82 to $79 per barrel. On-highway diesel prices followed suit, falling nearly 10 cents over the same period. Natural gas prices slipped from $6 per thousand cubic feet to near $5, even as colder-than-normal weather trimmed bloated inventories back to near-normal levels. Contacts say that the approaching end of winter is keeping natural gas prices relatively steady. In contrast, prices of chemicals and related products rose during the reporting period.

Labor Market
Most respondents noted steady employment levels. Still, there were scattered reports of layoffs at selected retail, high-tech, emergency vehicle and construction-related manufacturing firms. On a positive note, staffing firms continued to report increased hiring activity. In addition, there were reports of an uptick in staff levels at some energy service, food, high-tech and transportation manufacturing firms.

Wage pressures were nonexistent. A few firms reported they either had already given, or planned on giving small pay increases to employees this year. In contrast, real estate contacts noted that people were taking jobs at reduced salaries.

Construction-related manufacturers report that demand continues to bounce along the bottom. There is excess capacity in the industry and margins remain depressed. The outlook is still bleak, especially for manufacturers tied to commercial construction. Fabricated metals producers noted a slight uptick in orders, however, demand remains below year-ago levels.

Reports from transportation manufacturers were mixed. Producers of trailers reported steady demand over the past month, but said that orders were up both from three months and year-ago levels. Emergency vehicle manufacturers noted a cut back in production, and added that the outlook had weakened. An automobile manufacturer reported that sales in Texas are holding up better than in other parts of the country and the outlook is"bright", with steady growth expected throughout the year.

Reports from the paper industry were mixed. A large corrugated box manufacturer reported a moderate pickup in demand while other contacts, especially those tied to the construction sector, noted continued weakness. Respondents expect 2010 to be stronger than last year. Food manufacturers cited an increase in demand over the past month, and reported a positive sales outlook for the year.

High-tech manufacturers report continued strong growth in orders and production. Demand for semiconductors remains solid, and respondents say they are struggling to keep up with demand. Inventories are at very lean levels, and most contacts expect demand to remain robust over the next three to six months.

Petrochemical demand was mixed. Demand for products tied to domestic manufacturing rose further, while producers that sell to residential and commercial construction said domestic sales remained weak. Export demand is still strong due to the cost advantage of U.S. natural-gas based products over foreign oil-based ones, but producers say that this cost advantage has narrowed in recent weeks.

Depressed demand for refined products has further weakened margins, and contacts say refiners are responding with further cuts in utilization rates. Currently rates are below 80 percent, which excluding weather-related shut-ins, are among the lowest utilization rates over the past twenty-five years.

Retail demand held up relatively well during the reporting period. Contacts say year-over-year sales have improved, however, comparisons are favorable because of the weakness in year-ago numbers. Department store results were slightly better than expected. Consumers remain price conscious. Outlooks are still cautious, and contacts expect only a modest improvement in business this year.

Automobile dealers report seasonal softness in sales over the past six weeks. Inventories remain lean, and contacts expect gradual improvement in sales throughout the year.

Staffing firms report continued improvement in demand. Orders are streaming in at a solid pace and billable hours are up. Demand is still largely for contract work, but direct hire placements have recently picked up from low levels. Staffing industry contacts were more upbeat in their outlook compared with the previous reporting period.

Contacts in accounting services say strong demand for tax and audit services is outpacing continued weakness in advisory and performance improvement services. Demand for legal services remains sluggish.

Reports from transportation service firms are mixed. Intermodal firms report no change in cargo volumes over the past month as the rise in exports is being offset by a decline in imports. Contacts in railroad transportation cite a widespread increase in cargo volumes, and noted that the outlook is more upbeat than last time. Airline demand appears to be recovering, with leisure travel seeing continued growth, business travel improving and fares stabilizing. Contacts note that demand for air travel is expected to be flat to slightly up this year.

Construction and Real Estate
Housing contacts said new home construction picked up recently in response to relatively tight inventories and the first-time homebuyer tax credit. In both new and existing home markets, sales of lower priced homes remained the strongest. Sales of higher priced homes were weak, reflecting difficulties in obtaining financing for larger loans. Builder outlooks were slightly more optimistic for 2010.

Commercial real estate activity remains depressed. There is continued downward pressure on rents. Office leasing activity is still falling, albeit at a slower pace. Demand for industrial space declined further in Dallas, but improved slightly in Houston. Investment sales transactions remain low due to the tight lending environment, but contacts report that investors are watching closely for bargains. Commercial construction activity is still weak and outlooks remain grim, with most contacts expecting no improvement until 2011.

Financial Services
Financial service firms continued to report feeble demand for consumer and commercial loans. Real estate lending remained scarce due to stringent regulatory requirements, and contacts at community banks expressed concern about the possible effects of these regulatory requirements on their ability to expand. Some contacts said they were beginning to see an improvement in loan quality, with falling delinquencies and declining charge-offs. The outlook remained cautious but some contacts were hopeful that they may see a pickup in loan demand by year end.

Drilling activity rose strongly during the reporting period. Gas-directed drilling grew faster than oil-directed activity, reversing the trend seen in prior months. Oil field activity has improved along with the uptick in drilling, and contacts say capacity is beginning to tighten in selected lines of activity and in some geographic areas. Contacts are hopeful that the current expansion will last through the first half of 2010, as their customers continue to drill in order to secure leases, learn the new shale technology or simply because they anticipate being profitable at current prices.

Heavy rains and snowfall have boosted crop and pasture conditions. There is excellent subsoil moisture going into the spring planting season, which has improved the crop outlook for 2010. Though heavy precipitation has been beneficial, it has resulted in some crop losses and could delay spring planting if fields do not dry out in time. Livestock are in fair to good condition, and producers are using supplemental feeding to compensate for the harsh winter weather and wet pasture conditions.

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Last update: March 3, 2010