April 13, 2011 Federal Reserve Districts Eleventh District--Dallas

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The Eleventh District economy grew at a moderate pace over the past six weeks. Energy activity remained strong, refining activity picked up, and demand was strong for most petrochemical products. Reports from the manufacturing and non-financial service sectors were mostly positive. Financial services firms noted a slight improvement in loan demand. Conditions continued improving in the commercial real estate leasing market, and apartment demand was strong. The single-family housing sector remained weak however, and widening drought conditions were reported in the agricultural sector. Many responding firms across a wide variety of industries noted uncertainty about events in Japan and the Middle East, and some voiced concerns about shortages of parts in the near-term. Since the last report, price pressures increased, and there were more reports of hiring activity. Prices Price pressures continued to build since the last report. Many responding firms said high fuel prices were causing their input costs to rise, and contacts in the lumber and transportation services industries increased selling prices in response. Some manufacturers noted steel prices had risen, and most construction respondents said metal and petroleum based products, such as rebar, copper and asphalt had increased in price. In the service sector, airline fares were up significantly due to increases in the price of jet fuel. Legal contacts noted slight increases in billing rates, and retailers continued to report upticks in food prices. The price of crude oil rose from $85 per barrel in mid-February to over $100 per barrel in late March. Natural gas prices receded early in the reporting period as cold weather subsided, but strengthened again to over $4 per Mcf at the end of March, due to geopolitical uncertainties and rising crude oil prices. Prices for most petrochemical products increased since the last report, according to respondents. Labor Market There were increased reports of hiring activity compared with the previous reporting period. Staffing firms continued to note strong demand and were hiring for their own needs at a stronger pace than in the last report. Some transportation, food and primary metals manufacturers reported employment increases. A few contacts in the auto sales, railroad and airline sectors also noted a rise in hiring activity. Wage pressures were minimal, although some fabricated metals contacts were considering increases. Manufacturing Demand for construction-related products improved slightly, according to most contacts. Even after accounting for pent-up demand following bad weather in early February, cement, glass and primary metals firms and some lumber manufacturers reported some increase in activity. Apartment construction, residential repair and remodeling, and custom commercial projects were said to be driving the uptick. Fabricated metals producers said orders rose, but at a slightly slower pace. While overall activity is at low levels, most construction-related manufacturers' outlooks were more optimistic than they were six weeks ago, although there were some concerns regarding recent world events. High-tech manufacturing firms said the fallout from the ongoing natural disaster in Japan was the major factor impacting the industry since the last report. Contacts that ship a significant share of output to Japanese factories noted their profits will be negatively impacted, particularly in the first and second quarters of this year. One respondent estimated that shipments coming from at least one factory in Japan may not return to normal until September. Other than events in Japan, most firms said that conditions were stable. Paper manufacturers said demand had mostly recovered from the slump due to bad weather in January and February. Most firms said demand was stable or improved. Expectations are mostly for stable to improved demand over the next several months, although the longer-term outlook is more uncertain. Manufacturers of transportation equipment said demand was unchanged from the previous report. Outlooks remain cautiously optimistic, although some contacts noted concern about rising fuel costs and global uncertainties. Food manufacturers said orders rose at a moderate pace, and the outlook for sales was positive. Eleventh District petrochemical producers said domestic demand remained strong for plastics such as polyethylene and polypropylene. Still, higher U.S. prices for some petrochemicals have made exports less attractive. The major exception is PVC which is used in construction, as ample supplies and competitive prices due to low domestic demand have kept exports solid. Refiners said activity had picked up since the last report, with stronger demand for gasoline and oil products. Refinery margins rose despite the increase in crude prices. Retail Sales Eleventh District retail sales rebounded from weather-related sluggishness in the previous reporting period and grew modestly compared to the prior year. Home furnishings sales benefitted from strong seasonal trends. According to one large retailer, the Eleventh District continues to grow at a stronger pace than the nation, on average. Expectations are for a modest improvement in 2011 over 2010. Automobile sales continued to improve; however, respondents note concern over potential supply chain disruptions due to the ongoing natural disaster and nuclear calamities in Japan. Aside from these concerns, automobile dealers reported a favorable outlook for the balance of 2011 due to strong foot traffic consisting of high-quality customers. Services Staffing firms said demand held steady at high levels. Strength remains broad-based, with particularly strong demand coming from the steel, oil, customer service, IT and professional industries. All contacts had positive outlooks and expect continued strength in 2011. Demand for accounting services increased since the last report, as is typical for this time of year. One large firm noted that activity picked up noticeably for transactional business and mergers and acquisitions services. Continued improvement in business has reduced the pressure to keep fees low. Legal contacts noted mostly steady demand, with some strength in corporate services. Reports from transportation services contacts were mixed, but mostly positive. Intermodal transportation firms noted cargo volumes declined due to weaker demand from international clients. Railroad shipments increased moderately, with particularly strong volume growth in ores, motor vehicles, petroleum products and industrial construction materials. Container trade volumes flattened over the reporting period. Airlines reported continued steady traffic, although contacts noted that fare increases stemming from higher fuel costs could slow bookings. Most transportation services respondents were optimistic in their outlooks and expect growth in demand this year. Construction and Real Estate Eleventh District housing activity remains weak, and contacts expect more of the same in the coming months. Outlooks for the second half of the year were slightly more upbeat. Respondents said the first-time homebuyer market continues to deteriorate, but some realtors and builders said higher–end homes sales had increased modestly. Apartment demand accelerated since the last survey, and contacts said occupancy rates were improving and rental rates were rising. While construction activity is picking up, demand continues to outpace supply suggesting conditions will continue to improve in the near-term. Office and industrial leasing activity picked up slightly since the last report. With construction of office buildings and warehouses at very low levels, contacts say the modest acceleration in demand for space is likely to have a positive impact on vacancy rates this year. Sales of commercial property remained at low levels, although contacts noted a small uptick in sales of foreclosures and distressed properties. Financial Services Financial firms reported a slight improvement in overall loan demand. National banks reported some pickup in commercial and industrial (C&I) loan demand with increased corporate activity, while they continue to see weakness in commercial real estate (CRE). Regional banks noted that loan demand remains pretty flat, although there was a small increase in optimism regarding homebuilding and some CRE lending at the community-bank level. Most contacts said loan pricing remains aggressive amidst a highly competitive lending landscape. Outlooks are gradually improving in light of better outstanding loan quality and continued slow progress in lending conditions. Energy Drilling activity remained strong in Texas since the last report, with the state accounting for much of the increase in the U.S. rig count. The trend toward more oil-directed drilling continues. Although fewer rigs are directed to natural gas, those drilling for gas provide high levels of activity for service companies according to respondents. Contacts noted growing backlogs for horizontal drilling equipment and for crews used for both oil and natural gas activity. Agriculture Drought conditions became more widespread in March, covering more than 90 percent of the district. Hay production was down and wheat and oat crop conditions were poor. The lack of soil moisture is a large concern for spring crops, although planting was underway and mostly on schedule. Demand for agricultural products remained strong. Commodity and beef prices generally moved up, with scattered reports of rising food prices at the retail level. Input costs such as fuel, fertilizer and feed have risen, pushing up the cost of crop and livestock production. Return to top Kansas City San Francisco