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The Eleventh District economic expansion softened further in March and early April. Numerous contacts who do business nationally say growth in Texas is outperforming the rest of the country. Factory production declined, and there were a few reports of temporary and permanent plant closings. Service sector growth was mixed and generally weaker than reported in the last Beige Book. Retail sales were below expectations. Construction and real estate markets continued to soften. Financial-service firms are cautious about lending, but competition remained stiff for deposits and quality loans. Energy activity was still strong. Agricultural conditions improved.
Business leaders expressed concern that negative reports about the economy will affect future activity. A high level of uncertainty has led some firms to pare down investment and be cautious about staffing levels. Several manufacturing and service firms reported a deterioration in receivables.
Prices
A continuation of upward cost pressures prevails in the markets for many inputs, including fuel, packaging, shipping and raw materials, such as copper, aluminum, steel and liner board. Contacts said declines in the value of the dollar contributed to increases in the cost of imported goods and raw materials. Competitive pressures have forced most manufacturers to absorb some or all of the cost increases, but many service firms are able to raise fares, fees and prices.
Domestic demand for crude oil has been the weakest since 2003, but West Texas Intermediate Crude oil prices moved between $100 and $110 per barrel during the period. Gasoline prices are up about 25 cents over the past six weeks, and diesel prices are up 57 cents. Natural gas prices moved from $8 to near $10 per million Btu. High oil prices and some unplanned outages pushed ethylene and propylene prices up sharply. Downstream plastics producers also increased prices.
High inventories are pushing down selling prices for materials supplying residential construction, such as brick, stone and glass. Oversupply of semiconductor memory chips has put downward pressure on the prices of products and equipment that utilize these chips.
Labor Market
There were more reports of layoffs in manufacturing, but the overall labor market remained tight. There is still a shortage of skilled workers, particularly higher skilled positions, such as mid-level executives and experienced engineers. Some contacts say tighter enforcement of immigration laws has led to scattered farm labor shortages, notably for harvesting vegetables and fruit.
Manufacturing
Demand for materials to supply residential construction remained soft--significantly below a year ago--and weaker than expected. Inventory levels are high, and manufacturers are cutting back on production and staff levels. Sales of materials to supply commercial construction have softened some. Demand for paper was slower than normal. Food producers said sales have been better than expected. Transportation manufacturers supplying the defense industry reported continued strong demand, but other sales have slowed.
Excess inventory in the high-tech industry has led manufacturers to reduce production. Sales of equipment are down significantly over the past month and are expected to be weak through 2008. A large inventory of memory chips is pushing down prices. Contacts say there is a great deal of uncertainty, and they are unclear how much the slow down in orders is the result of inventory reductions or weakening demand.
Soft domestic demand and rising energy prices dampened petrochemical and plastic production. Refineries cut production in response to the highest gasoline inventories in 15 years. Gasoline demand is running 1.5 percent below levels of a year ago.
Retail Sales
Retail sales were weaker than expected, but national retailers said Texas sales are outperforming the rest of the country. Firms that offer credit noted an increase in delinquencies. Auto sales remained steady overall, with the strongest sales volumes for fuel-efficient cars. Rebates have softened prices somewhat, according to dealers, who say that financing is readily available to first-time buyers, even though some lenders have stopped making auto loans.
Services
Orders for temporary staffing services improved from the last report and were better than a year ago. Activity was strongest for positions in the service sector, particularly in IT and engineering, but activity to support manufacturing was sluggish. Temporary staffing firms say fees have been rising.
Legal firms reported an increase in bankruptcy and litigation work. Demand for legal services to support transactions fell some but remained strong to the oil and gas industry. Real estate-related activity has dried up. There was little change in demand for accounting services.
Shipping activity weakened, and firms are less optimistic about the outlook for the next few months. Import volumes continued to fall and are not being completely offset by exports. Airlines say domestic demand has been slightly muted by concerns about the economy, but advance bookings are holding up well. Carriers are cutting capacity as a precautionary measure. Fuel costs are putting upward pressure on fares.
Construction and Real Estate
Sales of new and existing homes continued to edge down and were below expectations. Contacts attributed lower demand to eroding consumer sentiment and the absence of subprime lending. Builders have cut back construction, resulting in a drop in the number of unsold finished homes. Apartment demand remained solid but slightly under expectations.
Commercial activity was mixed. Demand for industrial space is waning, and contacts said warehouse inventory has increased, particularly at intermodal facilities. Demand for office space was stronger than expected, but sales and investment dropped significantly. The decline of the commercial mortgage-backed securities market has led to difficulty completing transactions, according to industry leaders, who say there is no competition among lenders and little debt liquidity in the market.
Financial Services
Lending remained soft, and some respondents said uncertainty has led potential investment funds to wait on the sidelines. Financial service firms said loans are being evaluated with greater scrutiny to be sure they are well-collateralized. There is much more caution with real estate and mortgage loans. There is aggressive competition for deposits and a shift towards longer-maturity deposits that are more expensive for banks. Net interest margins are being squeezed, particularly for small-to-midsize financial institutions, and many respondents say they cannot take deposit rates much lower.
Energy
Drilling remained strong, with domestic activity increasing to the highest number of rigs working in the current expansion. Natural gas production was reported to be 8 percent higher than a year ago.
Agriculture. Planting conditions have improved, although some parts of the District remain unusually dry. High crop prices are offsetting high fuel, fertilizer and production costs. Supplemental feeding of livestock continues in most areas, and feed costs are high.
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