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Federal Reserve Districts

Eleventh District--Dallas

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Economic activity in the Eleventh District firmed up further over the past six weeks. Respondents in high-tech manufacturing, retail, residential real estate, energy and staffing and transportation services cited continued improvement in demand. Conditions in the commercial real estate, financial services and construction-related manufacturing sectors also showed signs of nearing bottom. Although respondents continued to express caution in their outlooks, overall expectations were slightly more optimistic than the last report.

Weak demand, excess capacity and competition continued to put downward pressure on selling prices or fees across several industries, and some contacts noted lowering prices to keep the business. There were reports of an uptick in raw materials prices for steel, fuel, cotton and sugar. Rising raw material costs are squeezing margins as many contacts are unable to pass on these increases to clients.

Crude oil prices rose from $75 in mid-February to over $80 per barrel in late March. On-highway prices for diesel and gasoline followed suit, rising nearly 20 cents per gallon. Prices of chemicals and related products also rose sharply largely due to plant outages. In contrast, natural gas prices slipped from $5.50 per Mcf to near $4 during the reporting period due to continued high levels of production, low industrial demand and the end of the winter season.

Labor Market
Employment levels held steady at most respondent firms. Layoffs have subsided but most firms are hesitant to hire new employees. On a more positive note, staffing firms continued to cite increased hiring activity, and there were reports from a few high-tech manufacturing, paper and lumber industry respondents that temporary hiring had edged up. A high-tech manufacturer noted opening a new plant, while a large discount chain operator said they were opening new stores and expanding headcount albeit at a much slower pace than before the recession. Additionally, some energy service and transportation manufacturing firms noted an uptick in hiring. Wage pressures were nonexistent, and a handful of firms reported they planned on partially reinstating employer matches to employee 401(k) plans or on giving small pay increases.

Reports from construction-related manufacturers were mixed, but overall they suggest that activity has bottomed out. Some firms noted that favorable weather in March led to an uptick in orders, while others reported continued weakness. Contacts say that while the "worst may be over", they expect a slow recovery in business. Fabricated metals producers cited a sharp rise in orders, and reported a positive sales outlook for the next three months.

Producers of trailers reported a large increase in orders over the past month, and added that they were building up inventories to better meet customers' needs. Manufacturers of emergency vehicles said growth in orders decelerated over the past six weeks as customers, particularly municipalities, are experiencing a decline in tax revenues. An aircraft components manufacturer reported an uptick in demand but said that orders remained significantly below year-ago levels.

Paper manufacturing firms cited flat to rising demand. Respondents say conditions have improved relative to last year, but the picture is far from rosy and expectations are for a slow and gradual recovery. Food producers said demand held steady over the past month, and noted a positive sales outlook for the year.

Respondents in high-tech manufacturing reported that orders continued to accelerate and the book-to-bill ratio was well above one. Contacts say inventories have increased slightly but still remain below desired levels. In an industry where prices typically fall, strong demand has helped stabilize prices. Most respondents are cautiously optimistic that demand will remain solid over the next three to six months.

Petrochemical producers report that ethylene plant outages have led to large increases in prices for ethylene and other related products such as polyethylene and polyvinyl chloride, which has dampened export demand for these products. Refinery margins remain very weak, and capacity utilization rates are below 80 percent.

Retail sales rose further during the reporting period. Large discount store chains noted an increase in demand especially for electronics and household items, and department store sales were also better than expected. Contacts say although consumers remain cautious, they are regaining confidence and are more willing to spend. Outlooks remain guarded but contacts expect continued improvement in sales throughout the year.

Automobile sales rose over the past six weeks, which contacts attributed to improving consumer confidence. Inventories remain lean. Prices are flat but rebates recently introduced by Toyota, have led other automotive manufacturers to follow suit.

Staffing firms say orders are streaming in at a solid pace and are well ahead of last year. Demand is still largely for contract work, but direct hire placements are picking up pace. Sustained growth in orders has boosted contacts' assessments of current conditions as well as their near-term outlook. Accounting firms note that demand outside of tax related services remains sluggish. Demand for legal services held relatively flat at low levels, with the exception of a slight uptick in energy-related activity.

Reports from transportation service firms were generally positive. Strong overseas demand pushed up intermodal cargo volumes over the past month. Small parcel shipping firms said a pickup in demand from the professional and business services, manufacturing and nondurable retail sectors led to positive growth in volumes. Railroads reported a modest but broad-based increase in shipments, and noted that the outlook is more upbeat than last time. Airline demand appears to be slowly improving, with leisure travel seeing continued growth and business travel stabilizing. Contacts expect demand for air travel to be steady this year.

Construction and Real Estate
Housing contacts noted more favorable conditions. Builders said sales in the first three months of the year were relatively strong, especially at the low end. Sales of higher priced homes are happening but they are not as widespread. Given the severe cutback in construction in the first quarter of 2009, builders have been pro-active in adding spec homes in hopes of sales and closings before the expiration of the current tax credit. Realtors were encouraged that prices were up slightly and noted the housing market was in the beginnings of a modest rebound. Overall, housing contacts were more positive in their outlooks.

Apartment demand in most Texas markets was "meaningfully positive," according to contacts. New product was leasing well and there were fewer move-outs in older units, consistent with an improving job market. Lower rents were "doing their job" and generating positive demand. The exception was Houston, where overall leasing was weaker.

Reports from commercial real estate contacts were mixed, but overall they suggest the sector may be nearing bottom. Declining rental rates have spurred leasing activity in the office and industrial markets. One industrial contact noted that landlords have "taken a realistic look" at conditions and are offering drastic reduction in rental rates on renewals. Respondents noted that while absorption had improved, there would be no construction any time soon. Commercial property sales activity picked up from very low levels. Contacts said while the good deals being offered were minimal; there were many interested buyers and lenders. Outlooks for the commercial real estate sector were mixed, with some contacts expecting continued improvement and others anticipating a longer, rocky road ahead.

Financial Services
Loan demand remains soft but appears to be stabilizing. Contacts are seeing more commercial and industrial loan activity in the pipeline as well as some improvement in credit card volumes and consumer loan demand, albeit with more aggressive pricing. Real estate lending is still restricted. Deposit growth has been relatively flat, and lending standards remain tight. Credit quality appears to have turned a corner, and is either stabilizing or improving. Despite a shift towards stabilization and slight optimism, much uncertainty remains around impending regulatory changes, particularly for community banks. Overall, most contacts expect growth in revenues and loan demand to be slightly positive this year.

The rig count rose further over the past six weeks. Oil-directed drilling continued to be boosted by rising oil prices. Contacts say the increase in gas-directed drilling is not justifiable at current low prices, but firms are drilling based on futures prices locked in earlier, to hold leases and to learn the shale technology. There is concern that gas-directed drilling will decline in the second half of the year. Demand for oil and gas services and equipment continues to grow with the rig count.

Wet weather continues to boost pasture growth. It has, however, delayed spring planting in some areas, which may lead producers to shift away from corn in favor of crops with shorter planting seasons such as cotton and grain sorghum. Net farm income is expected to be higher in 2010 compared with last year but below the ten-year average.

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Last update: April 14, 2010