Beige Book Report: Dallas
March 6, 2002
Eleventh District economic activity remained weak in January and the first half of February. Retail sales improved some, but other service-sector activity continued to be sluggish, and manufacturing activity was weak. Construction and real estate activity continued to soften. Energy activity showed signs of bottoming out, but many contacts fear a collapse in natural gas prices could lead to future declines. Respondents in the financial services industry have lowered their expectations for loan demand, but note that consumer lending has held up better than expected. Agricultural conditions remained dry. Prices and Labor Markets
There were some signs of increasing price pressures in the service
sector, but prices were mostly unchanged or lower in the manufacturing
and energy industries. Continued weak global demand and very warm
weather in the United States have pushed down most energy prices
despite stability in the price of crude. November 2001 through January
2002 was the second warmest ever recorded in the United States.
Crude oil prices were pushed up to near $20 per barrel in January
after OPEC and non-OPEC countries reduced production. Some contacts
expressed concern that if global demand does not pick up soon, OPEC
unity will be tested severely and a price collapse could follow.
U.S. crude inventories are 33 percent higher than last year, and
heating oil inventories are 23 percent higher than a year ago. There
is still too much petrochemical capacity, and downward pressure
on prices continues. Chemical inventories are very low because customers
expect prices to fall further. Warm weather has limited demand for
natural gas and left storage facilities very full. Companies that
hold natural gas in storage will not want to hold the gas over the
summer, and many contacts expect serious downward pressure on natural
gas prices in the Spring. Paper producers say that selling prices
continue to fall because of excess capacity in the industry.
Many industries continue to report rising costs for all types of insurance. Security costs are also rising, particularly for the airline industry. Contacts in several industries note that stiff competition has prevented these cost increases from being passed along to consumers. While labor markets have loosened, many firms say competition remains stiff for quality workers and wages are increasing for those employees.
Manufacturing
Manufacturing activity remained weak. Producers of fabricated metals
said demand continued to be very slow, while producers of primary
metals, brick and tile reported a drop in demand over the past 8
weeks. Paper producers say sales are still sluggish. One contact
noted that a lot of manufacturing has moved offshore, reducing demand
for packaging materials produced domestically. Demand for glass,
cement and concrete and food products was unchanged. Apparel producers
reported an increase in sales over the past 8 weeks, because retailers
are restocking after clearing out inventories during Christmas.
Still more layoffs were announced in the apparel industry as the
industry continues to move to lower cost off shore locations.
The high-tech industry reported that sales continued to bounce around the bottom of the cycle. While most respondents believe a recovery has begun, it is expected to be very slow. Demand for telecommunications products was still very weak, particularly in Europe, and sales of personal computers continued to be "anemic." Inventories are lean across high-tech industries, according to contacts.
Demand for petrochemicals and refined products remained weak. Some refineries have announced cuts in production while others have begun early turnarounds to produce gasoline for the spring and summer.
Services
Activity in the service sector continued to be sluggish, although
there were some areas of improvement. Temporary service firms said
that demand for workers remained down, particularly to supply manufacturing
and light industrial positions. Demand was strong, however, for
workers to staff administrative and clerical positions, the banking
and retail industries, as well as some professional services. Legal
contacts say transactional activity, particularly venture capital,
is slower than a year ago, but other types of business activity
is starting to improve. Litigation and bankruptcy work remained
strong. Accounting firms say activity remained strong for auditing
and taxes but consulting work had declined. Demand for transportation
services was still weak, but is showing signs of slowly improving
from the very depressed level a couple of months ago.
Retail Sales
Retail sales improved some in February from a very weak January.
Contacts say this is a difficult time of year to infer trends from
sales data and remain conservative with their purchases despite
recent signs of a pick up. Retailers are happy that inventories
have been drawn down. One contact explained that stronger-than-expected
sales could result in a brief price spike which they would prefer
to having too much inventory. Auto sales have been solid and better
than expected following the low interest rate deals from last year.
Inventories are a little high and the average gross profit on auto
sales is down.
Financial Services
Loan demand declined seasonally as expected at levels slightly lower
than a year ago. While contacts have generally lowered their expectations
for activity, they note that consumer lending has been stronger
than expected. Commercial and industrial lending has been flat to
moderately positive. Credit conditions are mostly unchanged, with
only a couple of contacts reporting an increase in delinquencies.
Credit standards remained stable since the last survey, according
to contacts, and are not expected to change in the near future.
Construction and Real Estate
Activity remained weak over the past 8 weeks. There was a slight
uptick in leasing activity in the Dallas area, stimulated by free
rent and other incentives. Contacts say long-term leases are only
being signed with deep financial concessions. Rents have declined
20 percent and are not expected to increase this year. The Houston
market has been jolted by the sudden addition of substantial office
space, leading to uncertainty about how low the occupancy rate could
fall.
Residential activity is still weak, and potential homebuyers continue to back out of deals, according to contacts. Existing home inventories have risen as people continue to leave houses they can not afford. Demand for multifamily housing is also weak and concessions are prevalent. Demand remains solid, however, for lower priced homes.
Energy
US drilling activity showed signs of bottoming out in recent weeks,
but there are concerns about future declines. Some projects are
being delayed and contacts say the possibility of a collapse in
natural gas prices could lead to a decline of as many as 150 rigs.
International drilling is also seeing some delays, although day-rates
for rigs in the deep Gulf and key international markets continue
to hold up well.
Agriculture
Overall conditions remained dry despite heavy precipitation in mid-February.
Land preparation for corn and cotton is proceeding on schedule except
in a few areas where producers had to wait for the ground to dry
out. Despite low prices and a large surplus of cotton, farmers are
continuing to plant as if it was a normal year. Ranchers are reducing
livestock herds because dry conditions have prevented pastures from
reaching their usual winter production levels.