September 18, 1991
Output growth in the 11th District economy has increased slightly since the last survey. The improvement has been centered in the residential construction and manufacturing sectors. Growth has continued weak in the service-producing sectors. Energy extraction has declined in response to persistently low natural gas prices. Consumer spending remains sluggish. Most retailers report disappointing back-to-school sales and auto sales remain at low levels. While the financial conditions of banks continue to improve, loan demand is flat. Agricultural conditions have weakened.
Orders to District manufacturers are rising, and most respondents say that their inventories are at desired levels. Growth in demand has been particularly noticeable in construction-related manufacturing. Producers of lumber and wood, and stone, clay and glass say that upturns in national and regional residential building have boosted their orders. Apparel, electronics, and electrical machinery firms note that their sales have risen because customers are replenishing depleted inventories. Demand for refined petroleum products remains flat, but petrochemical producers cite some recent gains in orders. Although declines in domestic drilling have reduced domestic orders for oil field equipment, overall District sales remain unchanged because of rising export demand. Indicative of the general expansion in manufacturing, makers of packing board and corrugated liners say that demand for their products has steadily increased over the past three months.
Growth in the District service sector is weak, Respondents in consulting and accounting services say that demand has been flat. Lodging industry respondents note softness in demand from business customers. Legal services, advertising agencies and temporary employment firms cite mild expansions in activity. Although most respondents express a good deal of uncertainty about their sales outlooks for the rest of the year, they generally expect mild growth.
Retail sales have picked up slightly but are below year-ago levels. Respondents report very competitive markets and disappointing back- to-school sales. Retailers are optimistic that sales will improve, although they expect the upturn to be slow in real terms. Most firms say that their inventories are at desired levels and that prices are stable. Dallas area sales show more weakness than elsewhere in the District. Auto sales are below year-ago levels.
Output in the District energy sector continues to decline. While natural gas prices have increased slightly, they remain near their lowest levels in 20 years. Drilling activity has declined, particularly in the Gulf of Mexico. Respondents note that if this winter is normal, natural gas prices should average a little higher than last year and oil prices should experience their normal seasonal rise. Oil prices should decline slightly next year due to increased sales from Iraq and Kuwait.
Construction activity has increased due to a moderate rebound in residential building. During the Middle East War, residential construction in the District temporarily deviated from its moderate growth trend. Since the end of the war, residential construction has gradually returned to its former growth rate. Commercial construction remains sluggish. Commercial vacancy rates in the major metropolitan areas remain high although they continue to fall. Builders show little hope for any significant expansion in commercial construction at least through the end of this year. Respondents note a recent decline in the demand for industrial office space. Industrial rents and vacancy rates are said to be flat overall.
District commercial banks report soft loan demand. While the financial condition of banks continues to improve, business loan demand remains weak. Respondents say that the reduced loan demand stems from sluggish economic activity, regulatory changes, and an availability of capital from other sources. Bankers do not expect loan demand to increase significantly over the next few months.
Agricultural conditions have worsened. Cotton prices, which were high during the first half of this year, have dropped due to higher yields. Although cotton farmers in the District are expected to harvest record volumes this year, shrinking government subsidies and recent price declines are said likely to reduce net cash income. The dairy industry remains depressed due to low milk prices. Livestock prices fell sharply in the first part of August and recovered somewhat in the following weeks. Livestock prices are not expected to fully recover until after September.