Beige Book Report: Dallas
March 15, 1995
The Eleventh District economy continued to expand in late January and February but at a slightly slower pace. Manufacturing orders rose, and activity at business service firms remained very strong. Retail sales slowed, however, and some contacts said that Texas sales were among the weakest in the nation. Construction activity was steady as an increase in commercial construction offset a decline in homebuilding. Loan demand continued to rise. Energy activity declined seasonally and remained below last year's levels. Agricultural production was better than expected. Despite the growth in the district economy, respondents in several industries said expectations of a slowdown in the U.S. economy and uncertainty over the effects of the Mexican peso devaluation had reduced their optimism.
Eleventh District respondents continued to report price and wage pressures in some industries, but several manufacturers expected price pressures to ease in the coming months. In the service industry, fees continued to rise for temporary, consulting and legal services. Trucking fees were down because Texas intrastate trucking deregulation resulted in increased competition. In manufacturing, selling prices were up for paper products, raw timber and cement. Contacts in the petrochemical, fabricated metals and glass industries said prices had likely peaked and expected prices to soften in the spring. Retailers said prices were flat to down despite increased cost pressure from suppliers. Oil prices were up slightly while natural gas prices had stabilized at a low level. In agriculture, cotton prices were up and livestock prices remained low. Because of recruiting difficulties, wage pressures rose in the temporary services, trucking and fabricated metals industries.
Manufacturing orders continued to rise, but respondents expressed less optimism that economic activity would continue to increase at the current pace. Demand continued to be strongest for electronics, paper, petrochemicals and construction-related materials, while apparel orders weakened. Semiconductor and computer-related orders rose at a strong pace and selling prices remained stable. The demand for paper and boxes continued to increase despite falling orders from Mexican customers. Orders for construction-related manufacturing products picked up as commercial construction increased. Fabricated metals producers reported very strong demand and were finding it difficult to hire qualified workers. Cement orders rose due to warmer-than-usual weather and significant construction backlogs. Demand for lumber remained unchanged overall, but orders from commercial contractors were up. Excluding jeans, apparel orders softened, a result of slower retail sales. Contacts said higher prices for cotton and paper products had raised costs, although only a small portion was passed on to customers. Garment finishers said that business was steady. Orders for food products rose at a moderate pace and sales of low-fat products were strong. Demand continued to be extremely strong for petrochemicals but additional capacity had dampened price pressures. Demand for refined products was robust, with sales of gasoline and other products running at levels above a year ago. The exception was fuel oil which did not sell well because of warm winter weather in the Midwest and Northeast. Refiners shifted production toward gasoline which drove down prices and kept margins thin. Orders for oil-field machinery were reported to be good, although the rig count slipped as drilling declined seasonally.
Economic activity at business services firms continued to rise at a robust pace. Demand for temporary services was strong and respondents said that recruiting problems remained. Demand for management/consulting services rose as companies streamlined computer systems and prepared to enter international markets. Legal firms said activity associated with mergers and acquisitions and initial public offerings was still strong, but litigation business was flat. Transportation service respondents said that air cargo volume rose and trucking demand was flat despite reduced shipments to Mexico.
Retail sales slowed in February, and sales along the Texas-Mexico border continued to decline. Several national retailers said that Texas sales were among the weakest in the country. Sales growth was reported to be slower than expected, and contacts said they were less optimistic than a few weeks ago. One retailer said the weak Mexican peso appeared to be affecting sales throughout Texas. Selling prices were reported to be stable or lower, despite increased cost pressure from suppliers. Auto sales were also slower in February, and respondents said inventories were too large.
Construction activity in the Eleventh District was steady, as rising commercial activity continued to offset declines in single-family construction. Home builders cut back on construction in January and February as they tried to keep the supply of new homes in line with lower buyer demand. Despite the cutback in building activity, inventories of new homes were rising. Commercial construction remained robust and border contacts said that many projects are still in the works despite the Mexican peso devaluation. Rising demand for industrial, retail and office space helped boost commercial builders' expectations of growth in 1995.
Eleventh District bankers said overall loan demand grew steadily. Higher interest rates continued to curb demand for residential construction projects, but lending for industrial projects picked up. Competition from alternative credit sources kept consumer lending flat.
District energy producers said activity was generally unchanged. The domestic rig count fell seasonally and remained below year-ago levels, but international activity improved with better oil prices. Oil prices were between $18 and $19 per barrel over the past month which is slightly higher than reported in the last beige book. Natural gas prices stabilized at about $1.40 per Mcf.
Favorable weather boosted the agricultural harvest. District farmers said the yields and quality of most crops were good. Cotton production was raised by strong domestic demand, although higher prices curbed international orders somewhat. Cattle prices remained low, keeping profit margins just above break-even levels.