Dallas Beige Book
June 6, 2012 · Dallas Beige Book Reports
The Eleventh District economy expanded at a moderate pace over the past six weeks. Manufacturing activity was flat to up, demand for business services rose and transportation services activity was mixed. Energy activity remained strong, and the housing sector continued to improve. Retail sales rose moderately, and auto sales were strong. Loan demand picked up since the last report. Drought conditions improved. Most firms reported no change in selling prices. Employment levels were steady to slightly higher, and wage pressures remained minimal. Most firms' outlooks are optimistic, although many respondents expressed concern about U.S. political uncertainty and the European debt situation.
Most responding firms said prices were unchanged, although some noted that input prices ticked up slightly. Retailers said selling prices were stable, although food prices increased. Auto dealers said prices were unchanged. Transportation service firms expect lower energy surcharges by July due to recently reduced prices for jet and diesel fuel. In contrast, airlines expect a slight upward trend due to higher fuel costs compared to last year at this time. Agricultural producers noted lower commodity prices and input costs.
The price of WTI fell from near $100 per barrel to the low $90 range over the reporting period. Natural gas prices rose to $2.70 MMBtu after falling under $2 in early April. Respondents said the substitution of natural gas for coal in power generation reduced inventories, although they remain 40 percent above normal. The price of gasoline fell about 20 cents per gallon, and diesel prices fell by 15 cents. Spot prices for several petrochemical products fell sharply as plants returned to production following maintenance, and contacts expect contract prices to follow.
Employment levels were flat to up slightly at most responding firms. Staffing firms said demand picked up over the past six weeks after a slight softening during the prior reporting period. Reports of small employment increases came from some high-tech, transportation, metals, construction materials and food manufacturers. Contacts in auto sales, staffing and transportation services also noted slight increases. Wage pressures remained minimal, although wage increases were noted by some legal firms.
Overall demand for construction-related materials improved during the reporting period. Favorable weather and improved residential and commercial construction activity provided a boost to stone, clay and glass producers. Primary and fabricated metals manufacturers reported steady demand, and producers of lumber and related products noted a broad-based increase in orders. Construction-related outlooks were generally positive, but some contacts are concerned about domestic political uncertainty and unfavorable developments in Europe derailing the pickup in activity seen so far this year.
High-tech manufacturers said orders continued to grow at a moderate pace. According to contacts, demand for logic devices was strong, while orders and prices for memory chips remained weak. One respondent noted some strengthening in industrial demand and orders for communications infrastructure equipment, such as cell phone towers. Inventories were near desired levels. The outlook for the next three to six months is for mild to moderate growth, although one contact said a recent increase in new orders has raised the likelihood that production may pick up in the second half of the year.
Aviation equipment manufacturers said demand was flat during the reporting period. Contacts were more pessimistic in their outlooks for the year, citing soft demand and negative economic news as key factors. Recreational vehicle manufacturers reported weak sales, in part due to economic uncertainty and fuel price shocks. Food producers said sales activity increased over the past six weeks, and orders were well above year-ago levels. Reports from paper manufacturers were mixed, but contacts expect modest sales growth for the year.
Petrochemicals producers reported moderate domestic demand but said export demand slowed, partly a result of higher U.S. plastics prices, but also due to weaker growth in Asia and the Middle East. Notably, contacts said domestic PVC demand rose for the first time in a long time in response to an increase in housing starts and other construction. Outlooks for the petrochemical industry were positive, and announcements for new construction or expansion continue at a rapid pace. Refiners said margins improved slightly in early May.
Retail sales grew modestly over the comparable period from a year ago and performed in line with contacts' expectations. Strength was seen in sporting goods and men's and women's apparel. Eleventh District sales growth was stronger than the nation on average, according to a large national retailer. Contacts noted that consumers still seem a bit hesitant, but business is improving nonetheless. Inventories are in good shape and being managed closely. Automobile sales continued to rise over the reporting period. Car sales were especially strong, but trucks were selling well too. Contacts' outlooks remain optimistic and they expect continued growth in vehicle sales.
Staffing services said activity picked up over the past six weeks, following a slight softening in demand seen during the prior reporting period. Shortages of skilled IT professionals continued, and several contacts reported an increase in demand for construction workers. Legal firms reported steady demand, with continued strength in corporate, intellectual property and energy services. Contacts also noted a slight uptick in estate planning, lobbying and real estate related services. Accounting firms noted a modest pickup in demand largely due to growth in mergers and acquisitions related activity.
Reports from transportation service firms were mixed. Small parcel and air cargo volumes increased, while railroad shipments and shipping container volumes declined during the reporting period. Intermodal firms reported an increase in cargo volumes largely due to strong demand for oil field supplies.
Airlines said passenger demand improved over the past six weeks. Domestic demand increased, while demand for international travel was flat. Contacts said business travelers continued to be price sensitive and were purchasing restricted discount fares. Responding firms expect passenger demand to remain steady over the next three months.
Construction and Real Estate
Contacts in the single-family housing industry noted consistent indications of recovery in Texas markets. Respondents said sales are up year-to-date, and some builders were beating sales expectations. Agents noted solid sales for existing homes, and outlooks are more positive. Apartment market respondents said that after first quarter softness, demand came back stronger in recent months, as expected. Texas apartment markets continued to outperform other parts of the U.S., according to contacts. Rental rate increases slowed, but remain relatively healthy. Apartment construction activity is still at low levels, but is expected to pick up in the second half of the year.
Commercial real estate leasing activity remained strong across Texas metros. Houston, in particular, saw robust office and industrial demand growth thanks to strong energy sector expansion. Construction activity is expected to improve modestly in Texas markets in the second half of 2012. Some contacts noted a recent trepidation in the capital market/lending environment due to heightened worries about European debt problems.
Financial firms reported a modest uptick in loan demand. National banks reported strength in middle-market lending, auto loans and corporate merger and acquisition activity. Regional banks also noted improved sentiments. Several banks suggested energy-related activity remains robust. Some smaller business and middle-market deals have begun to crop up. Outlooks are generally less pessimistic, and some outright optimistic, with an overall theme that "loan demand is slightly stronger." Loan pricing remains competitive. Outstanding loan quality continues to improve and contacts note fewer problem loans.
Respondents at energy-related firms said drilling activity remained strong, and the District rig count grew modestly over the past six weeks. The shift from dry-gas drilling to wet-gas or oil-directed drilling continued, and some firms noted logistical problems as they try to move crews and equipment. Overall, contacts say that outside of pressure pumping and fracturing used in dry-gas drilling, the market for oil field machinery and services remains very strong.
Drought conditions improved over the reporting period, particularly in West Texas thanks to recent rains. Better soil moisture continued to improve prospects for the 2012 crop year, and pastures greened up for livestock producers. The wheat harvest began and yields so far were above average.
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