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Federal Reserve Districts

Eleventh District--Dallas

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The Eleventh District economy expanded modestly over the past six weeks. The energy sector remained a source of strength, and agriculture, transportation services and staffing firms reported solid growth. Retailers said sales rose, but the pace of growth was slower. Reports from the manufacturing sector were mixed, but overall suggest a slowdown. In particular, construction-related manufacturers said demand was very weak as housing demand has retrenched and private nonresidential activity is almost nonexistent. Most respondents expect economic conditions to remain positive, although many expect slower growth through year-end. Uncertainty was prevalent in most outlooks.

Selling prices held steady at most responding firms. Retailers said prices were flat and airline fares stabilized after increases earlier in the year. Contacts across industries said pricing was extremely competitive. There were, however, scattered reports of price increases in a few industries. Paper producers and aircraft manufacturers said they were able to pass on increased input costs. Additionally, prices for some petrochemical products rose slightly. Some staffing firms were attempting to raise fees due to strong demand. Contacts in the agricultural industry said commodity prices had moved up recently. Cotton prices are up nearly 50 percent over last year and cattle prices have risen strongly.

Crude oil prices fell below $73 per barrel by late August after a run up to $82 earlier in the month. The price of gasoline, diesel and heating oil fell during the reporting period, as inventories rose due to weak demand. Contacts said natural gas prices edged down to just under $4 per Mcf by late August as the national heat-wave subsided.

Labor Market
Employment levels were stable at most firms, and the overall labor market remained somewhat slack. Some contacts in the lumber and trailer manufacturing industries reported layoffs. On a more positive note, there were scattered reports of hiring activity. Staffing firms cited continued increases in placement activity, and a few contacts in transportation services, legal services, automobile sales, and transportation manufacturing said they had added workers. Wage pressures were generally nonexistent, with exceptions found in the airline industry and for some temporary workers.

Most producers of construction-related materials--including brick, lumber, cement, glass and primary and fabricated metals--said conditions remained weak. Several respondents tied to housing construction said orders were especially low in July because of the vacuum created by the end of the tax credit. Contacts that produce products used in nonresidential construction noted most activity was related to public projects. Outlooks were slightly more pessimistic than in the last report, with several contacts expecting no turnaround until 2012. A primary metals producer that sells to transportation manufacturers was more upbeat and expects increased orders in coming months.

Manufacturers of high-tech products said demand held steady over the past six weeks. Growth in orders has leveled off in recent months after a replenishment of inventories earlier in the year that drove very strong growth. Most respondents characterize current order levels as good. Although inventories have increased, respondents said they are relatively lean and in some cases below desired levels. Several semiconductor contacts said that industry-wide capacity has fallen about 30 percent over the past three years and, even with growing capital expenditures, capacity utilization is likely to remain very high for the next two to three years. Outlooks were positive for the remainder of the year.

Paper manufacturers reported flat to declining sales over the past six weeks. Contacts said customers are very cautious about keeping inventories, due to pessimistic economic outlooks. Growth in demand for food products stalled since the last report. Respondents said they did not see the normal summer boost this year.

Non-defense aircraft manufacturers said orders held steady over the past six weeks and are above year-ago levels. Outlooks were cautiously optimistic. Trailer producers said demand had fallen as uncertainty about the national economy increased. Sales are expected to be slow through year-end.

Petrochemical producers were mostly optimistic, noting domestic orders were strong and growing. Export growth was positive but slower, as current prices were less competitive in Europe and Asia. The only reported weakness was for vinyl products used in housing and commercial construction. Refiners noted weaker conditions as seasonal gains in gasoline consumption did not materialize and distillate (diesel and heating oil) consumption slipped back. Contacts expect a decline in capacity utilization rates and refining runs due to weaker margins.

Retailers noted that growth has slowed recently, but sales are up on a year-over-year basis. Customers continue to focus on non-discretionary items while shunning big-ticket purchases. Eleventh District sales trended slightly above the nation over the reporting period, a change from the previous report. Outlooks suggest that while sales growth may be slower for the remainder of the year; overall 2010 sales should show positive single-digit growth.

Automobile demand held steady over the reporting period. Contacts said inventories are at appropriate levels and manufacturers are incrementally increasing production. Expectations are for continued modest improvement.

Most staffing firms report that demand continues to grow at a solid pace, and is particularly strong for light industrial, sales, administrative, professional and technical workers. Placement activity continues to be mostly for contract work as employers are still hesitant to hire permanent staff. Near-term outlooks are optimistic, but respondents are cautious about the longer term. Accounting firms note that while demand for tax-related services has slowed seasonally and that for real estate and construction-related work remains nonexistent, there has been a pickup in transactional and consulting activity. Demand for legal services was largely unchanged during the reporting period, with the exception of an uptick in corporate demand for mergers and acquisitions-related activity.

Demand for transportation services remains positive. Railroad respondents noted a broad-based increase in cargo volumes, with shipments of grain products recording the largest increase. Shipping firms said small parcel cargo volumes rose, while large freight shipments declined during the reporting period. Intermodal transportation firms reported a modest increase in shipments. Airline traffic was flat to slightly down since the last report, but is stronger than a year ago. The outlook is for continued stability in air travel demand.

Construction and Real Estate
Home sales continued to slide since the last report. Contacts noted demand was especially weak in the lower-priced segment of the market which had benefitted most from the homebuyer tax credits. Construction of new homes fell as large public builders scaled back. Outlooks are guarded for the rest of the year. Sales and construction are expected to remain weak, as the tax credit affected the timing of purchase decisions.

Contacts in the office and industrial real estate sectors said leasing activity remained subdued. Investor interest in nonresidential properties remains high however, and contacts say sales continue to edge up.

Nonresidential construction remains weak. Contacts reported a notable lack of private nonresidential projects. Public construction is the main source of activity for most contacts, but some expressed concern that such projects would subside due to budget constraints.

Financial Services
Financial firms said loan demand continued to trail off. Business lending was especially weak, and contacts said businesses lacked confidence and were unwilling to make financial commitments. Deposit growth was strong, and credit quality on outstanding loans was stable. Several respondents reported concerns over financial reform legislation and other political uncertainties. Earnings projections are flat for 2011, and some contacts were building up loan loss reserves in preparation for the coming year.

Drilling activity in the Eleventh District rose since the last report. The Permian Basin in Texas led the increase, as activity continues to be directed to land-based oil. Drilling service companies noted solid demand and improved margins. Contacts noted that the deep water drilling moratorium will impact revenues, but strong domestic land and international activity is mitigating the impact.

Hot, dry weather reduced soil moisture in most of the District, but drought conditions are minimal. Respondents said crop conditions remain very strong, and yields for harvested crops are above average. A record cotton crop is expected for Texas this year. Demand for U.S. agricultural products has picked up in the wake of the devastating flood in Pakistan and drought in Russia, and most commodity prices have moved up as a result.

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Last update: September 8, 2010