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Eleventh District economic activity continued to show signs of slow improvement in late-April and May. However, contacts in several industries were disappointed that growth did not pick up as much as they had hoped. Energy activity was up sharply, and manufacturing activity increased. Demand for business services remained unchanged overall, but there were some mild signs of strengthening. Retail sales continued at roughly the same, lackluster pace as the last Beige Book. Construction and real estate activity was weak. The financial services industry reported little change in deposit or lending activity. Drought continued to plague the District's agricultural industry, but the Farm Bill should help the industry's cash flow.
Prices and Labor Markets
Stiff competition is preventing price increases in many industries, according to contacts, but there are some reports of higher prices, mostly related to energy products and insurance. Oil prices rose briefly to an 8-month high-over $29 per barrel for West Texas Intermediate--but have now fallen back to $26. Natural gas prices also increased--to $3.75 per million Btu--but fell slightly in the last week. In recent weeks, energy prices have been driven more by international supply factors than by changes in demand. Natural gas inventories are 23 percent higher than the 5-year average for this time of year. Despite increasing demand for natural gas, some analysts expressed difficulty in reconciling current high inventories and high prices. Chemical prices have risen, mostly because of higher natural gas feedstock prices. High levels of refinery output pushed wholesale gasoline prices down slightly, even as the price of crude was rising. With tariff protection, steel prices have increased, pushing up prices for fabricated metals. Soaring insurance premiums were reported as a serious concern for most industries.
Manufacturing
Manufacturing activity increased, but most manufacturers remain very cautious about the outlook. Food producers say sales are up seasonally, as expected, while demand for apparel products has increased. According to contacts, fears of further increases in steel prices have spurred strong sales of fabricated metal products. Demand for lumber, cement, clay, brick and glass were mostly unchanged, which was better than expected for some contacts. Demand for primary metals and paper products was unchanged and below the level of a year ago.
High-tech manufacturing continues to slowly improve, but respondents note that growth is very uneven. Sales of consumer items such as of DVD players, electronic games, appliances and wireless devices are improving, while business investment in technology equipment remains weak. Inventories are reported to be mostly in good shape. Respondents who produce mostly for the consumer market are optimistic that growth will continue to improve over the next six months but those who serve the business market are very uncertain about the short-term outlook. Contacts in the telecommunications industry report no improvement in demand and believe the recovery will take longer than expected.
Demand for petrochemicals has increased. While inventory restocking has helped drive petrochemical sales, there is growing evidence that a significant part of the demand surge is related to economic growth. Refineries have been operating at high levels of production for most of April and May, but have recently lowered the rate of production slightly because gasoline prices--and refining margins--have weakened.
Services
Demand for business services was unchanged overall, but there were some signs of mild strengthening and several firms said they were hiring. Temporary service firms reported steady demand over the last three months. Manufacturing, light industrial and call center activity has been solid, according to temp firms, but weakness remains in the telecommunications and financial sectors. Legal firms say litigation, corporate and bankruptcy work remained strong, but real estate and venture capital cases are weak. Demand for accounting services was flat, although firms in Houston and Dallas reported very strong demand from customers switching away from Arthur Andersen. Demand for transportation services remained stalled and very weak. The airline industry reports continued excess capacity, which is keeping price competition stiff.
Retail Sales
Retail sales continued at roughly the same pace as the last Beige Book. While retailers blame unseasonable weather for continued sluggish sales activity, most contacts believe consumer spending is not increasing. Retailers have generally become less optimistic about future sales growth since the last Beige Book. Inventory levels are in good shape, largely due to cautious purchasing over the past few months. Auto sales have been decelerating, with growth slower than a year ago.
Financial Services
Deposit and lending activity was mostly unchanged over the past few weeks. Deposit growth was resulting largely from loan repayments that contacts speculated were stimulated by debt consolidation or mortgage refinancing. Lending activity was flat. Consumer and mortgage lending continued to be the strongest categories. Business lending is unchanged to slightly slower than a few weeks ago. Larger banks continue to suffer from a lack of market-related activity, such as mergers and acquisitions.
Construction and Real Estate
Construction and real estate activity was weak. Dallas and Austin office markets are saturated, according to contacts. Rents are falling and numerous concessions are being offered. Home builders reported a decline in sales and slow traffic during what is typically a busy time of year. Builders are offering concessions to stimulate sales, including favorable financing, zero closing costs, prepaid expenses and free sprinkler systems. Sales remained strong for homes priced below $150,000, with few incentives. The market for multifamily dwellings in Dallas and Austin has weakened over the past few weeks, but the Houston market is holding up according to contacts.
Energy
Energy activity has increased sharply. The U.S. rig count picked up steadily for the past seven weeks stimulated by higher oil and natural gas prices and healthier balance sheets for producers. Land-based drilling for natural gas accounts for almost all of the gains in activity, but contacts say there are signs that activity in the Gulf of Mexico may soon begin to pick up. Oil service firms report growing back orders. Foreign activity has been down slightly, primarily due to cuts in Latin America, especially Venezuela.
Agriculture
Drought continues to plague District agriculture, and yield forecasts are being downgraded. Financial assistance from the recently passed Farm Bill will provide cash flow assistance for producers. Contacts expect Texas to lose its "bovine tuberculosis free" status, which would increase the cost of production because all livestock leaving the state would be required to have a tuberculosis vaccine.
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