October 30, 1996 Federal Reserve Districts Eleventh District - Dallas

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In September and early October, Eleventh District economic activity expanded at a slightly slower pace than reported in the last beige book. There were more reports of lower prices than in the last beige book, but some prices were higher, including energy, and there were more reports of labor shortages leading to wage pressures. Manufacturing activity was mixed. Strengthening energy activity led to an increase in energy-related manufacturing, and the electronics industry reported a slight increase in demand, but slower growth in home building led to softer demand for construction-related manufacturing. The financial services industry reported little change in loan demand over the last six weeks. Retail sales were sluggish in September but picked up in early October. Rain improved agricultural conditions, but the effects of the 1996 drought continue to be evident. More industries reported falling prices than in the last beige book, but some reported rising prices. Overcapacity in the trucking industry led to a drop in shipping prices, despite higher fuel costs. Falling demand led to lower aluminum and scrap iron prices. Lumber producers said prices were down 20 percent over the last 6 weeks, but some types of lumber experienced price increases. Prices continued to fall for semiconductors and personal computers, although a few contacts said some semiconductors prices were "flat" or "stabilizing." Telecommunications prices were flat to slightly down. Most retailers reported no change in selling or input prices, and a few reported that prices were lower. Selling prices for apparel products were unchanged despite some reports of rising input costs, particularly for chemicals and wages. New home prices softened, while office rents continued to rise. Selling prices for paper products were up, partly due to higher raw material prices, and contacts expect more increases next year. Crude oil prices were pushed as high as $25 per barrel from $21, thanks to strong demand, continued tension in the Middle East and the collapse of the Iraqi oil for aid package. Continued low inventory levels for heating oil have kept its price steadily rising over the past six weeks. Heating oil prices are the highest since the Persian Gulf War began, and are expected to increase if the winter is normal or colder. A shortage of low-wage workers led to scattered wage pressures in a few industries, such as apparel, retail and the hospitality industry. One contact attributed the labor shortage to a recent influx of telemarketing firms. Contacts reporting wage pressures said they were already paying above the minimum wage, with the exception of a couple of apparel firms and one retailer. Engineers are reported to be in short supply, particularly for the telecommunications industry. Wages were rising for engineers and production workers in Dallas, as well as computer programmers and computer scientists. Highly skilled construction workers continued to be in short supply, leading to wage pressures, but reports suggest there are plenty of construction workers in the less-skilled crafts. Manufacturing activity was mixed. Electronics firms reported a slight increase in orders, but demand was down for construction-related products. Demand for energy-related manufacturing was up. An increase in demand for personal computers led to a slight increase in computer and semiconductor manufacturing, and contacts said inventories are approaching desired levels for most products. Telecommunications manufacturing increased, and the industry is hiring in anticipation of further growth. Slower home building reduced demand for brick, primary and fabricated metals, and led to some layoffs. Aluminum and scrap metal producers reported demand had fallen by 25 percent and 15 percent, respectively. Lumber sales were steady, but down from last year. Paper producers said demand was up over the last three months, but not as good as a year ago. Apparel sales were up slightly, and several firms said they are hiring. Cement sales increased recently, due to increased demand from the oil industry. Petrochemical demand is up along with prices and profits. Synthetic fibers are the weakest part of the market, but sales of plastics for film and packaging are strong. Refiners on the Gulf Coast said crude prices continued to rise as fast as product prices, cutting into profits, and contacts said the Gulf Coast seems to be suffering from overcapacity. Retail sales were sluggish in September but picked up in October. Many contacts said sales were below expectations. Several retailers noted that competition is stiff, and one said "we're all fighting over market share." Contacts are cautiously optimistic about the holiday season. One contact said "we are expecting sales will improve because they will have to improve to meet our forecast." Auto sales slowed more than expected, and a Texas contact was surprised that "you can walk into a showroom and purchase a Suburban immediately." Sales jumped 12 percent in Houston, however. The financial services industry reported little change in loan demand. Refinancings continued to decline and other residential real estate loans were down overall. Commercial real estate lending was flat, although credit standards had tightened somewhat over the last three and twelve months. Construction and real estate industries reported steady growth in demand for new and existing commercial space but weakening demand for residential space. Respondents said sales of new homes were falling and backlogs...which had kept construction strong in the past several months..were lessening. Sales of existing homes were reported to be flat at good levels, however. In the commercial sector, demand for new warehouses and retail space kept construction activity strong, and rising demand for office space continued to push up rents, especially in suburban areas. Energy activity strengthened. High prices kept demand for oil services extremely strong, with little capacity available anywhere in the industry. Offshore activity is particularly strong, operating near 100 percent of capacity. Contacts mentioned shortages of offshore rigs, drill pipe, geophysical skills, and drilling crews. Rain improved agricultural conditions, but the effects of the 1996 drought continue to be evident. The winter wheat crop is looking good although planting has been delayed by rain and armyworms. Still, the corn crop is forecast to be 21 percent below 1995. The Upland cotton crop is expected to be down 18 percent, but in many areas cotton yields are turning out less than expected. 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