Beige Book Report: Dallas
September 13, 1995
Eleventh District economic activity weakened in August. Generally, contacts expect continued expansion over the coming months, but combined they expressed wide variance in the strength of that expansion. Economic activity remained sluggish along parts of the Texas-Mexico border, and contacts expressed little optimism that activity there will recover quickly. Manufacturing orders remained unchanged or slower for several products. Retail sales were weak. Demand for most business services increased, but cargo shipments had declined. Construction and energy activity was steady, and financial institutions continued to report steady loan demand. Agricultural conditions were unchanged.
Price and wage pressures were mixed. Oil prices strengthened from a low $17 to near $18 per barrel through August. Natural gas prices were also up slightly, as were wholesale gasoline and fuel oil prices. Strong demand led to scattered price pressure in the service sector, and labor shortages pushed up wages for some types of workers. There was little price and wage pressure in manufacturing industries, however, and most chemical prices had fallen. Retailers reported that heavy competition led to larger markdowns on selling prices, and most contacts expect continued downward pressure on prices.
Manufacturing orders remained unchanged or slower for several products although demand remained very strong for telecommunications and semiconductor products. Also, orders were up for food products and primary metals. Demand for fabricated metal and other construction-related products was unchanged, as were sales of apparel. Paper producers reported slower demand for most of their products. Orders of petrochemicals continued to weaken, thanks to sluggish domestic demand, particularly from construction and auto markets, and a limit on petrochemical imports by China. District refining is operating at less than full capacity only because mechanical problems have shut down a few facilities, but margins have weakened as oil prices have risen faster than gasoline prices. The market for oil services and drilling equipment continued to be strong, despite relatively weak domestic drilling activity. International work, and strong activity in the Gulf of Mexico, continues to offset any domestic weakness onshore.
Demand for business services picked up, while demand for trucking and air cargo services declined slightly. Legal firms reported more mergers and acquisitions activity, increased hiring and an optimistic outlook. Growing demand for specialized consulting and accounting services enabled firms to raise fees and increase hiring. Temporary firms continued to report strong growth and higher fees, but the cost of upgrading technology and increased recruiting kept profit margins from increasing. Several temporary firms reported difficulty finding qualified employees. Decreased freight volume and heavy competition at trucking and air cargo firms resulted in discounting and a slightly pessimistic outlook.
Retail sales were weak in August, with continued declines along the Texas-Mexico border. Retailers were surprised by the absence of back-to-school shopping, which has raised their concern about the outlook. Automobile sales were up slightly.
Financial institutions reported steady loan demand. Residential real estate lending was up slightly, while commercial real estate and business loan demand held steady. Business lending is reported to be strongest to the service sector, with little demand for loans from manufacturing or retail companies. Contacts reported that all types of lending had weakened substantially along the Texas-Mexico border because "the reality of the peso crisis is setting in." Overall, contacts expect little change in loan demand in coming months, although they are uncertain about the outlook.
Construction activity was steady at high levels. Contacts reported no change in new home construction, but home sales remained much higher than earlier in the year. Demand for industrial buildings and suburban office space continued to rise, and contacts in these sectors remained optimistic. Apartment construction remained above year-earlier levels, but respondents were increasingly concerned that the large number of units scheduled for completion in 1995 and 1996 may lead to stagnant rents and rising vacancy rates.
Energy activity was up slightly in August. Higher prices for oil, gas and related-products led to a modest increase in drilling. Natural gas continued to lead drilling activity, but domestic oil drilling was up, rebounding from low levels. Inventories of crude oil continued to fall, and American Petroleum Institute data showed the lowest levels of domestic crude inventories in the last 10 years.
Agricultural conditions were unchanged, with continued hot, dry weather and scattered insect problems. Crop progress was reported to be generally on schedule, although insects and rain had delayed harvest activity in some areas. Most crops are reported to be in good condition. Major cotton crop losses from severe insect problems in parts of South Texas should be offset by good yield prospects in other parts of the state. Ranges and pastures were beginning to show signs of stress in areas where the hot, dry weather prevailed. Livestock remained in good condition.