The following is the text of the Federal Reserve Board’s eleventh District--Dallas.
The Eleventh District economy grew at a moderate pace over the past six weeks. Overall manufacturing activity continued to expand. Demand for business services remained solid, and transportation services activity increased. Respondents said retail sales grew at a somewhat slower pace than the last report, and automobile sales held steady. The housing sector continued to improve, and commercial real estate leasing activity held steady. Financial firms noted mixed loan demand. Overall energy activity remained strong, although gas-directed drilling continued to decline. Agricultural conditions deteriorated slightly. Employment levels were steady to slightly higher, and prices were mostly unchanged. Wage pressures remained minimal. Outlooks across industries were generally positive, but some respondents expressed concern about European debt issues, U.S. political uncertainty, and healthcare costs.
Most responding firms said prices were unchanged from the last reporting period. However, accounting firms noted a modest rise in rates, airlines reported higher fares, and some construction- related manufacturers said they were able to raise selling prices as a result of improved demand. Overall, input costs were flat to down, with reports of lower prices for cotton, scrap metal, and steel. The recent decline in fuel prices lowered costs for airlines and freight transportation firms.
The price of WTI ranged from around $83 per barrel in early June to near $85 in early July. Natural gas prices remained depressed but rose 50 cents to around $2.85 per thousand cubic feet over the same period. The price of gasoline declined about 40 cents over the reporting period. Prices for several petrochemical products fell sharply due in part to softening global demand.
Most responding firms said employment levels were flat to up slightly. Staffing firms reported demand remained steady at very high levels and noted rising demand for financial analysts, steel and metal fabricators, and construction workers. Reports of hiring came from some retailers, automobile dealers, and primary metals, lumber, paper, and food manufacturers. Wage pressures remained minimal, although legal contacts said raises and bonuses had improved, and rising wages were noted for manufacturing workers with specialized skills such as machine operators.
Overall demand for construction-related products held steady since the last report, and respondents’ outlooks have become slightly more guarded. Producers of stone, clay, and glass reported improved demand and higher capacity utilization rates compared to earlier in the year. Contacts in the lumber industry noted a pickup in demand, while primary metals manufacturers reported slight declines. Producers of fabricated metals reported steady sales activity, but said they were concerned about the continuity of some private projects.
Conditions weakened in the high-tech manufacturing sector since the last report. Most respondents said growth in orders slowed or remained flat largely due to a weakening global economy and more uncertainty in outlooks. Contacts said that inventories were close to desired levels and that employment levels were stable. High-tech manufacturers expect growth to remain flat or weaken slightly--a change from earlier in the year when most contacts expected a pickup in the second half.
Demand for paper products held steady, and contacts said they expect modest sales growth for the year. Food producers said sales activity increased over the past six weeks and orders were up significantly from year-ago levels. One food manufacturer reported adding several new workers in part due to strong demand. Automobile and aviation equipment manufacturers said demand held steady since the last report. Expectations are for seasonal pickup in automobile sales over the summer, but aviation manufacturers expect sales to remain flat.
Petrochemicals producers reported a sharp decline in prices due to softening global demand, lower feedstock prices, and capacity coming back online following unplanned outages earlier in the year. Still, margins have remained relatively healthy for ethylene and polyethylene producers. Domestic demand for PVC, tied to residential construction, strengthened, and exports continued to be a major source of sales. Contacts noted inventories of gasoline and distillates were below normal, and Gulf Coast refineries were operating at rates above 90 percent in order to catch up.
Retail sales increased but the pace of growth decelerated slightly compared to earlier in the year. Sales of apparel, bedding, household items, and small furniture fared well. Discount retailers said sales of food and sundries continued to perform the strongest. Overall sales growth in the Eleventh District continued to outpace the nation, on average, according to three large retailers. Outlooks are cautiously optimistic and contacts say it appears as if the environment has improved slightly for the consumer.
Automobile sales continued to grow at a steady pace. Inventories were at desired levels and prices remained stable. Auto dealers expect sales growth to continue at the same pace through year end.
Demand for staffing services remained steady at very high levels, and contacts noted an increase in orders for financial analysts, construction workers, and steel and metal fabricators. Outlooks were mostly positive but slightly more cautious than the last report. Accounting firms noted a seasonal slowdown in demand. Demand for energy and audit-related services increased modestly while advisory, transactional, and tax services activity softened slightly. Legal firms reported a pickup in demand, with continued strength in real estate, intellectual property, energy, and tax-related services.
Reports from transportation service firms were positive. Railroads noted a slight increase in shipments, with particularly strong growth in petroleum products, motor vehicles and equipment, crushed stone, and metals. Air cargo, container, and small parcel shipments increased modestly during the reporting period. Airlines reported stable passenger demand over the past six weeks. Domestic demand remained strong buoyed by both corporate and leisure travel. Demand for international travel was strongest for travel to South America and Mexico. Airlines expect passenger demand to soften in the fall and ramp back up over the holiday season.
Construction and Real Estate
Contacts in the single-family housing industry said demand picked up over the past six weeks. Respondents noted that demand was outstripping supply in some areas, leading to falling inventories. Construction activity was picking up as result. Realtors and builders remained cautiously optimistic. Apartment market respondents continued to report solid demand. While rental rates continued to rise, the pace slowed slightly. Apartment construction activity is expected to pick up in coming months.
Commercial real estate leasing activity remained steady since the last report. Energy and technology sectors continue to drive demand for space, particularly in Houston. Contacts were optimistic but remained concerned about the pace of U.S. economic activity.
Overall, financial firms reported mixed loan demand. National banks said middle-market lending declined, while auto and energy lending activity remained positive. Regional and community banks noted improvement in C&I and commercial real estate lending. Consumer lending appeared to be steady, with strong mortgage demand and a healthy backlog of loans in the pipeline. Loan pricing remained competitive at very low rates. The quality of outstanding loans continued to improve slowly and deposit growth was mixed. Outlooks are slightly more pessimistic than the last report in part due to European debt issues and regulatory and political uncertainty.
Respondents at energy-related firms said activity remained strong, and the District rig count grew modestly over the past six weeks. The rapid shift from dry-gas drilling to oil-directed drilling has not reduced the overall pace of activity, and business remains strong with long lead times and growing backlogs. Activity in the Gulf of Mexico increased further, and the success of a recent auction of offshore acreage suggests continued interest in the region.
Agricultural conditions deteriorated slightly due to hot and dry weather. Planting neared completion and crops were mostly in fair to good shape, with conditions much better than a year ago. Since the last report, livestock producers have seen pastures dry out, cattle prices fall, and feed costs increase. Crop prices generally increased over the past six weeks, particularly for corn, although cotton prices fell sharply.