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Federal Reserve Districts

Eleventh District--Dallas

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The Eleventh District economy continued to grow at a moderate pace, and outlooks were more positive than in the last report. Manufacturers reported increased activity. Demand for business services was solid, and activity in transportation services rose modestly. Housing and commercial real estate markets continued to improve. Overall building activity remained subdued, with the major exception being robust multifamily construction activity. Contacts said retail sales growth was tepid and automobile sales held steady. Financial services respondents said overall loan demand edged up. Energy activity was strong, and agricultural conditions improved. Employment levels were flat to up slightly. Price and wage pressures were modest.

Contacts across most industries said prices held steady. The exceptions were some producers of transportation equipment, fabricated metals and food who noted slight increases in selling prices to partially offset higher input costs. Airlines reported higher fares, and shipping firms noted an increase in express package and freight delivery rates.

The price of WTI was near $100 per barrel during the reporting period. Natural gas prices fell from $3 per thousand cubic feet in early January to near $2.50 in mid-February. Gasoline prices rose by about 22 cents per gallon over the past six weeks, and the price of diesel rose by 7 cents. Prices of petrochemicals and plastics increased since the last report.

Labor Market
Employment levels were unchanged at most responding firms but some contacts noted increases. Staffing firms continued to report high levels of demand. Oil services and machinery firms continued hiring at a rapid pace, and slight employment increases came from some auto dealers, airlines, and transportation, food and high-tech manufacturers. Shortages of skilled workers continued to be reported, particularly for the energy industry. Wage pressures remained minimal, although upward pressure for certain positions such as auto mechanics and software engineers was reported. Several firms said annual cost-of-living adjustments took effect at the start of the year.

Overall demand for construction-related materials improved, and several contacts noted that orders were up from year-ago levels. Mild winter weather, robust multifamily construction and booming oil field activity provided a boost to some producers of lumber, stone, clay and glass. Fabricated metals manufacturers noted a pick-up in growth since the last report, in part due to government projects. Producers of primary metals reported a broad-based increase in orders, and one contact said they were adding a new manufacturing plant. Construction-related outlooks were more positive than in the last report, and several contacts expect a slight rebound in activity this year.

High-tech manufacturers said orders edged up moderately since the last report. Demand for semiconductors and other electronic products improved, largely due to a pickup in demand for automobiles, mobile devices and cloud computing. In addition, one respondent noted that retailers of electronic goods had been paring down inventories in the second half of 2011 and that orders picked up as retailers ended the inventory reduction. Most contacts expect a gradual improvement in demand over the next three to six months.

Emergency vehicle, automobile and aviation equipment manufacturers said demand was flat to up since the last report, and expectations are for strong sales growth this year. Food producers noted an uptick in orders from the prior report, largely due to stronger consumer demand. Overall conditions in the paper products sector were mostly unchanged.

Petrochemicals producers reported several large planned and unplanned outages at ethylene and polyethylene production facilities, which led to a sharp increase in prices. Export demand for polyethylene and caustic soda continued to trend up, while domestic PVC demand remained weak due to low levels of housing construction and infrastructure projects. Refiners noted weak demand for petroleum products nationally, although refineries on the Gulf Coast were seeing slightly higher margins than some other parts of the country. Contacts noted Gulf Coast refineries were investing heavily on repairs and maintenance during the current spring turnaround season.

Retail Sales
Retailers said overall sales growth was tepid during the reporting period, largely due to unseasonably warm weather. However, sales of non-seasonal items like menswear and home furnishings remained strong. Eleventh District sales trended roughly in-line with the nation over the reporting period, according to three large retailers. Inventories were at desired levels. Contacts noted that the retail environment had improved, and expectations are for moderate sales growth this year.

Automobile sales held steady from the prior report. The used car market remained tight. Vehicle inventories were somewhat lighter than normal. Expectations are for moderate increases in new car sales this year.

Demand for business services was solid and outlooks were generally more optimistic than in the last report. Staffing firms continued to report high levels of demand, noting more direct hires than temporary placements. Demand for skilled professionals, particularly IT workers was strong, while orders from the banking sector and demand for clerical staff declined. Legal firms reported steady demand, with an uptick in corporate activity and continued strength in intellectual property, energy and real-estate related services. Accounting firms reported strong seasonal demand for tax related services.

Reports from transportation service firms were positive. Air cargo volumes rose, while container shipments were flat during the reporting period. Railroads noted a broad-based increase in shipments, with particularly strong growth in petroleum products, motor vehicles and equipment, nonmetallic minerals, crushed stone, metals and metallic ores. Shipping service firms reported an increase in small parcel shipments from the prior report.

Airlines reported passenger demand improved over the past six weeks. Domestic demand and travel to Latin America were solid, while travel to Mexico and the Pacific was weak. Contacts said business travelers remained price sensitive and were purchasing restricted discount fares. Responding firms expect passenger demand to remain stable over the next three months.

Construction and Real Estate
Housing demand continued to firm since the last report. Sales of existing homes increased moderately and new home sales were flat to slightly up. Some contacts noted that in January, which is usually a slow month, buyer interest and activity was strong due to favorable weather and record low interest rates. In addition, a fast-declining inventory of homes was reported. Respondents expect the positive trend in sales to continue, and outlooks suggest a modest increase in new home construction in 2012. Apartment leasing activity remained strong since the last report, and responding firms said Texas markets were outperforming the U.S. average. Investor interest in sales and development of multifamily complexes continued to increase. The pace of current multifamily construction was said to be catching up with historical norms.

Nonresidential real estate activity continued to pick up, although construction remained at low levels. Contacts said recent reports on leasing for office and industrial space suggest moderate gains, thanks to demand from the energy and high tech sectors. Investment sales activity continued to improve, in part, due to very attractive interest rates. Contacts were optimistic in their outlooks.

Financial Services
Financial firms reported a modest uptick in loan demand. National banks reported strength in middle-market and large corporate lending activity, and several regional banks noted energy-related activity was robust. Outlooks were generally more optimistic than at year-end 2011. Contacts said loan pricing remained moderately aggressive, loan quality continued to improve and problem loans were declining. Respondents noted they were willing to make loans, and borrowers' financial positions were reportedly better than last year.

Energy-related service firms reported very strong demand over the past six weeks, despite a small dip in the rig count due to low natural gas prices. A few gas-directed drilling firms have announced drilling cuts, but respondents expect oil-directed activity to offset the losses. Oil service firms expect strong orders, high investment activity and good overall prospects in 2012.

Recent rainfall eased drought conditions in several areas, particularly in the northeastern parts of the District. The rain helped refill stock tanks and benefitted pasture conditions. Farmers were a little more optimistic about spring planting. Demand for agricultural products remained strong. Contacts said cattle prices climbed to record levels, largely due to tight supplies. High commodity prices have helped agricultural producers' margins, but elevated input costs have erased some of those gains.

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Last update: February 29, 2012