Beige Book Report: Dallas
June 22, 1994
The rate of economic growth appeared to be unchanged in May and early June. Demand remained moderately strong in many industries, and most contacts did not expect a change in the rate of growth of economic activity through the end of the year. Manufacturing orders were steady, and demand for business services remained moderate. However, retail sales growth was reported to be sluggish and below expectations, particularly for apparel. Although construction and real estate activity continued at fairly high levels, softness in the homebuilding industry has begun to appear. Energy production, drilling and services continued to rise at a moderate pace, but did not accelerate with higher oil prices. District bankers said that loan demand had increased strongly, but competition for loans was intense. Planting and crop growth was generally on schedule, but weather damage affected some areas.
Manufacturing orders were steady. Demand for construction-related materials remained strong, with brick, cement and glass producers reporting higher demand and prices. Brick and cement producers were operating at 100 percent capacity, and said that they were having trouble filling orders. Several non construction-related manufacturers expect demand growth in 1994 to be good but lower than in 1993. Demand continued to be strong for electrical and electronic machinery, particularly telecommunications products. Selling prices of semiconductors stopped declining, and demand decelerated slightly as manufacturers had expected. Although orders for primary and fabricated metals remained strong, contacts said that steel and scrap metal prices had fallen. Sales of lumber and wood products were steady to slightly higher but below this time last year. Demand for paper products was up, and contacts reported that they had increased their prices slightly. Apparel producers said that sales were steady or slightly higher. Garment contacts were mixed about upcoming changes in the industry resulting from NAFTA. Some contacts have found entering the Mexican market to be harder than they expected but believe that Mexico will be a source of future sales. One contact is concerned that increased demand for labor in Mexico will raise the firm's production costs there. Sales of food and kindred products were down slightly. Demand for drilling services and machinery was steady for natural gas but down slightly for oil. Foreign demand for services and equipment remained sluggish, especially from the Middle East and Nigeria. However, sales had increased to Latin America, particularly Venezuela after privatization of its oil industry. The arrival of the summer driving season increased demand for gasoline, but higher crude oil prices squeezed refinery profits. Demand for chemicals continued to increase, and prices rose 10-15 percent for some products. Sales were strongest for the styrene chain, especially polystyrene, and went up for ethylene and polyethylene as well. Chemical sales to Europe increased strongly, but Asian markets generally remained weak.
Most business service firms reported steady demand. Activity at temporary service firms remained unchanged overall with higher demand from electronics and telecommunications firms. Law firms said that activity was slightly higher, and they were trying to do more work without hiring. Demand for advertising and communications had declined. Hotels reported increased bookings but fewer than they had expected for the World Cup. Airlines noted slower passenger demand than expected, although traffic was above a year ago. Air, rail and trucking cargo continued to increase strongly. Competition and lower fuel prices kept transportation prices unchanged despite higher demand.
Many contacts reported that May retail sales growth was slower than expected. Sales picked up slightly in early June leading retailers to be cautiously optimistic that sales growth would continue. Demand for apparel products remained weak, while sales of building and home improvement products were strong. Some national contacts reported that Texas retail sales growth was slower than the rest of the nation's with particular weakness along the Texas-Mexico border. Competition was keeping selling prices below last year's levels, and contacts said that they were purchasing fall merchandise at the same price or slightly higher than in 1993. Automobile sales were sluggish in May but picked up in early June. Still, dealers reported that they would like to increase their inventories of some vehicles. Auto prices were stable.
Construction and real estate markets remained fairly strong, but homebuilders reported a slowdown in new home sales and traffic. Although contacts were optimistic about the outlook for the rest of the year, home prices have generally flattened, and some builders reduced their prices. Apartment markets, however, remained tight and occupancy rates and rents moved higher. A pickup in demand for office and industrial space boosted commercial construction. Prices and rents increased for office and industrial property.
Energy production and drilling continued at a moderate pace but did not accelerate with higher oil prices. Oil prices rose to $18 per barrel in mid-May from a low of $14 in March. Natural gas prices fell briefly in May encouraging distribution companies to make major injections into storage tanks that had been depleted by winter's cold weather. Drilling had not staged its normal seasonal turnaround, but the rig count remained well ahead of last year. Most drilling continued to be for natural gas and in the Gulf of Mexico.
District bankers said that although loan demand continued to increase strongly, competition for loans was intense. Contacts said that some banks were loosening their credit standards to extend business loans. Bankers complained that regulations, such as mandatory appraisals, were making it difficult for them to compete with mortgage bankers and other lenders. Home mortgage refinancing had fallen dramatically, but originations for home purchase had not.
Planting and crop growth was on schedule, but unfavorable weather weakened some agricultural production. Heavy rain prevented some cotton producers from planting their crop, although planted cotton was in good condition. Dry conditions had stressed ranges in the Trans-Pecos and South Texas, but livestock remained in fair to good condition. Texas farmers expect to harvest about 25 percent less wheat than last year because the crop was damaged by dry weather and a hard freeze earlier in the year. The Texas May All Crops Price Index was 7.2 percent above 1993's level, while the Livestock and Livestock Products Price Index declined 10.6 percent from last year.