Economic Research Publications
Dallas Beige Book
January 13, 2010
Economic conditions in the Eleventh District continued to firm up over the past six weeks. Contacts in several industries, most notably retail, high-tech manufacturing and staffing services, reported improved demand. While conditions appeared to be recovering in many sectors and outlooks were becoming more positive, most contacts only expected a slow and modest improvement in the near term.
Price pressures were generally subdued, with a few exceptions. Intermodal firms continued to drop prices to attract new customers, and legal, staffing and accounting service firms noted ongoing pressure to discount fees. Pricing of construction-related materials remained very competitive. In contrast, staffing firms said that a large increase in the state unemployment insurance tax in January 2010 will significantly raise costs and squeeze margins as pass-through to clients has been mixed. Airlines noted that fares were stabilizing, and retailers said prices were reverting back to relatively normal levels. Paper and corrugated-box manufacturers reported rising raw material costs and an uptick in selling prices. There were also reports of slight increases in crop and industrial metal prices.
Crude oil prices briefly fell below $70 during the reporting period, but have climbed back up to near $80. These gains have been driven by improved economic data, longer-term dollar weakness, and conflicts involving Russia, Iran and Nigeria. Contacts noted that proposed price increases for polyethylene and polypropylene did not stick in December. Prices of other chemical products were stable. Despite recent increases in natural gas prices due to cold weather, contacts said high inventories, weak industrial demand and rising production point to continued weakness in natural gas markets.
Most respondents noted stable employment levels. Still, a few construction-related manufacturing firms continued to report payroll declines. Contacts in the energy industry reported that several firms had announced plans to reorganize operations and move a large number of professional jobs overseas. On a positive note, an aircraft components manufacturer noted an uptick in staff levels, and a primary metals manufacturer reported an increase in work hours. Retailers said holiday hiring was reasonable.
Wage pressures were mostly nonexistent but a handful of firms said they planned on giving small pay increases next year. Although employer matches to 401(k) plans remained suspended at most firms, one company reported plans to partially reinstate employer contributions to retirement plans.
Construction-related manufacturers reported continued weakness in demand. Most contacts say there is excess capacity in the industry, and capital spending plans are on hold except for maintenance-related projects. The outlook remains bleak, especially for manufacturers tied to commercial construction. Fabricated metals producers noted no change in demand.
Contacts in high-tech manufacturing report orders and sales continue to grow at a moderate to strong pace, partly due to continued improvement in the world economy. One respondent noted that Windows 7 was helping personal computer sales, and that demand for smart phones and laptops was increasing strongly. Inventories remain very lean but at desired levels. The outlook is for continued moderate to strong growth over the next six months.
Reports from transportation manufacturers were mixed. Aircraft components manufacturers reported a seasonal decline in demand, but remained positive in their outlook for next year. Manufacturers of emergency vehicles noted a slowdown in the pace of orders, and added that thinning backlogs were pointing to a potential slowdown in business around mid-2010. Demand for corrugated packaging continued to improve, and outlooks for 2010 were optimistic. Food producers reported a seasonal pickup in demand.
Demand for petrochemicals was little changed. Modest gains in domestic demand continued but growth in exports slowed somewhat. Contacts say with new petrochemical facilities coming on line in the Middle East, processors are holding back on building inventories until they see the effect of these new facilities on U.S. exports.
Retail activity increased during the reporting period, and retailers said that the holiday season was shaping up to be a reasonable one. Discount stores reported an uptick in demand for non-food items, with sales of electronics and household goods faring better than expected. Department store sales were also ahead of expectations. Still, discounting was prevalent as consumers remained price-conscious. The outlook is cautiously optimistic, with contacts expecting a slow recovery in business.
Automobile sales held steady over the past six weeks. Contacts say the worst has passed, and they expect demand to remain flat in the near term.
Staffing firms said demand for contract work continued to improve but orders for direct hires were flat at low levels. Although orders were widespread across sectors, demand was strongest for call center, clerical, healthcare administrative and manufacturing staff. Demand for legal services remains depressed, but contacts noted a slight uptick in inquiries from clients on merger and acquisition-related services. Accounting firms reported steady demand for their services.
Reports from transportation service firms were mixed. Intermodal firms reported no improvement in cargo volumes over the past month as imports have dropped and exports are not picking up as expected. Small parcel shipping and large freight volumes increased further, continuing a trend that began in the summer. Contacts in railroad transportation noted continued declines in cargo volumes as increases in grain, chemicals, petroleum products and automobile shipments were more than offset by declines in shipments of coal, pulp, paper, lumber, wood, crushed stone and metals. Airline demand appears to be recovering, fares are stabilizing, and contacts note that the outlook is slightly brighter for 2010.
Construction and Real Estate
New and existing home sales rose over the past six weeks. Homebuilders said that while overall starts remained at low levels, the momentum from the homebuyer tax credit was helping demand, especially in the entry-level segment. Prices continued to firm. Several contacts said smaller builders were still unable to access credit to finance new construction. Outlooks were guarded but optimistic.
Conditions in the apartment sector were weak, as occupancy rates continue to fall and rents are edging down. Elevated construction activity has led to an oversupply of apartments, although contacts say activity will slow in the near term. Outlooks are modestly optimistic. Respondents expect a recovery in most of the major Texas markets in 2010.
Office and industrial leasing activity remained feeble. Contacts said "nothing is going on and business is very slow." There is still some concern over how commercial real estate loans will be worked out as they come due, given the decline in collateral value. Investor interest continues to rise, however, with one respondent reporting a significant increase in the number of bids for properties on sale.
Loan demand remained soft. Commercial real estate lending was scarce, and community banks continued to curtail residential real estate lending due to tough regulatory requirements. Loan pricing was slowly returning back to "normal," as some contacts have removed pricing floors or returned to original base rates such as prime. Deposit growth was steady but credit quality continued to deteriorate. Despite weak conditions, contacts at most financial services firms--excluding those that failed--said they have managed to end the year with flat or very modest growth in loan volumes. The primary concern among most contacts is still the uncertainty surrounding impending regulation. The outlook remained cautious and most contacts said they did not expect any significant improvement until at least fourth quarter of 2010.
The rig count continued to rise over the past six weeks. Current oil prices are driving up most types of oil-directed drilling activity. The increase in shale-based natural gas drilling, however, remains focused in a few areas, with some traditional gas-bearing regions continuing to see consolidation and downsizing.
Rainfall continues to boost agricultural conditions across the state. Farmers have been able to plant the winter wheat crop into moist soil. Nearly all crops have been harvested, and the crop outlook for 2010 has improved. Although drought conditions have been alleviated, the dry spell has tightened producers' cash flow and contacts say delayed disaster payments may prevent some farmers from planting the next round of crops.