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Beige Book Report: Dallas

June 20, 1990

The District economy is growing slowly, but respondents remain optimistic. Manufacturing has shown little change recently. Growth in retail sales has softened. District auto sales are up slightly. Services activity is expanding somewhat. Construction contract values continue to fall. Oil and gas drilling firms remain optimistic about further growth. Agricultural prices lately have slipped a little, but remain well above a year earlier.

Manufacturing firms cite little overall change in orders, but survey responses vary widely among industries. Oil-field equipment sales growth is accelerating. Respondents expect further increases in sales in 1990. Steel firms note rising orders after a soft period in late 1989. They also say that selling prices have increased during the last two months. Reports by respondents in the fabricated metals industry vary widely but, on average, show little change. In the lumber and wood products industry, reports are mixed. Firms that serve national markets are seeing slowing homebuilding-related sales. Firms that chiefly serve District markets have seen growth lately. As a result of heavy spring rains, some lumber firms are having difficulty removing logs for cutting. Among stone, clay and glass producers, brick firms cite expanding orders. Cement firms express concern about sluggishness in state highway construction contracting while noting that demand has not changed. Electronics and computer-related firms say their commercial sales are generally increasing after a slump in late 1989, but that declines in defense sales and in sales to defense contractors have been more rapid than the firms had expected. Some of these respondents said that reductions in orders from defense firms had resulted in overall dropoffs in orders.

Among nondurable goods industries, apparel producers note slowing sales, and food-processing firms also note some decreases. Paper producers say that overcapacity in their industry together with declines in demand, has motivated price reductions and that the high dollar has discouraged exports. Most chemical firms say that demand and prices for their products range from unchanged to slightly down, but that orders remain high and plants are mostly running at or near capacity. Refinery production has remained unchanged, but gasoline prices and profit margins are up.

Retail sales expansion shows signs of slowing, after strong growth early in the first quarter. But some chains say their District sales are still outperforming their national sales. After a very weak Memorial Day sales period, expansion rebounded somewhat, but the recent pattern of softness continues to concern some respondents.

District auto sales are up slightly over last year. In April, year- over-year growth was strong in Dallas, moderate in San Antonio and negative in Houston although Houston's January-April sales were 7 percent above last year. Sales of U.S.-built foreign brands have posted particularly high rates of expansion.

Service firms generally report some growth in demand, but responses are more mixed than in recent previous surveys. Labor contracting and temporary employment firms note some recent increases in overall demand, but they say that reductions in defense-related work in Las Cruces and White Sands, New Mexico have led to decreasing demand there. Most business service firms report that their sales are now fairly strong, and that they are cautiously optimistic about expansion during the next two quarters, but that recent demand has not been great enough to allow most of them to raise prices. The exception within this industry group has been data processing firms, for which both demand and selling prices are up.

District construction remains weak. Nonresidential contract values have risen somewhat in recent months, but remain well below levels of late last year, while nonbuilding contract values have fallen sharply. Residential values have declined, but considerably less than nationally. They have actually increased in Houston and Dallas/Ft. Worth. These gains have been led by multifamily construction, which has grown in response to rising apartment rents and occupancy rates. Occupancy rates in major office markets are also increasing, but remain low.

Although oil prices have fallen in recent months, the District energy sector continues to expand. In May, the District rotary rig count was up 44 percent from a year earlier. During the past several months, employment in oil and gas extraction has rebounded. Most respondents offer favorable outlooks for long-term oil prices, but one noted that oil prices may be set for another big drop in the near term. Natural gas prices are generally expected to rise.

In District agriculture, water has been a concern lately. Heavy spring rains impeded normal planting patterns, but recent warm temperatures have dried topsoil sufficiently to permit seeding. Receding flood waters along the Trinity River are leaving behind heavy losses. Prices received by farmers and ranchers in May were 1 percent below April levels, but remained 8 percent above a year earlier.