December 4, 1996 Federal Reserve Districts Eleventh District - Dallas

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From mid-October to mid-November, Eleventh District economic activity rebounded from sluggish growth in September and early October. Several industries reported a general firming in prices after reporting falling prices in the last Beige Book, and contacts continued to report that labor market tightness was leading to some wage pressures. Rebounding home sales led a pick up in construction, which helped stimulate demand for some construction-related manufactured products. The electronics industry also reported rebounding sales and, overall, manufacturers were more optimistic about the sales outlook than reported in the last Beige Book. Retailers reported "good" sales growth over the past six weeks, while high prices continued to boost demand for oil services. The financial services industry reported a decline in the demand for loans. Continued rainfall improved agricultural conditions overall. Prices Several industries reported a general firming in prices after reporting falling prices in the last survey. Prices were stabilizing with a downward trend for semiconductors (including memory chips), after falling precipitously earlier this year. Prices remained very competitive with a downward trend for personal computers and telecommunications products. Retailers were pleased that prices were mostly holding steady, and a few noted that they are now able to pass on cost increases that they had eaten in the past. Still, retailers said that the market remains very competitive limiting price increases. Auto dealers said prices on new models are expected to be slightly higher "but nothing unusual." Low inventories are causing energy prices to swing with the weather. Crude oil prices weakened to $22.50 in early November but rebounded to near $25 per barrel after a cold spell in the Northeast. Heating oil and natural gas prices also fell and then rebounded, as low inventories are contributing to weather-related price volatility. Scrap metal prices continued to fall. Wages Hiring difficulties in several manufacturing and service industries continued to lead to upward wage pressures for specialized skills and some low-wage workers. Manufacturing Sales of manufactured products rebounded slightly, and manufacturers were generally more optimistic about the sales outlook than reported in the last Beige Book. Demand was up for most electronics and a few construction-related products, such as fabricated metals and brick, while equipment sales to the energy industry continued to be very strong. Contacts in the electronics industry seemed relieved to report a seasonal increase in orders for semiconductors, computers and telecommunications equipment, and were more optimistic about the outlook for the industry than they were earlier this year. Electronics inventories were reported to be in better shape than earlier this year, although several contacts said inventories were still too large. Apparel manufacturers said sales were up over the past month, partly as a result of increased sales to Mexico. Oil machinery companies continue to report extremely strong demand. Demand for corrugated boxes and packaging supplies increased seasonally, as expected, and most contacts said inventories were appropriate. However, packaging contacts were less optimistic than earlier this year about the outlook for sales. Petrochemical producers are being hurt by higher prices for natural gas liquids and oil. Demand remains strong, but not strong enough to pass through all of the increased feedstock costs. Refiners have seen profit margins improve with higher gasoline and heating oil prices, but regard margins to not be high on a historical basis. Food and cement manufacturers said there was no change in demand for their product. Lumber sales were down slightly, although contacts were more optimistic about the outlook than six weeks ago. Scrap metal sales continued to fall. Retail Sales Retailers reported "good" sales growth over the past six weeks. Most contacts were more optimistic about holiday sales, despite some nervousness about the shorter holiday season. Inventories were in line with expectations, and some contacts suggested there will be less pressure to discount prices than last year. Sales were reported to be particularly strong for better men's and women's apparel. Consumer electronics retailers reported sluggish personal computer sales, although demand for peripheral equipment remained strong. Auto dealers reported continued sluggish sales. Dealers do not expect sales growth to improve for the next few months "with nothing to make the market snap given that interest rates are pretty low already." Financial Services Lending activity was weaker than six weeks ago, led by a drop in demand for commercial and industrial loans, and residential real estate loans in San Antonio and Houston. Refinancings continued to decline. Consumer auto loan demand was up in Dallas. Contacts remain cautious about the outlook for lending, although some respondents are looking for a pickup in residential real estate loan demand over the next year. Construction and Real Estate Contacts said demand for construction and real estate was up since the last Beige Book. Home sales rebounded after a drop in September and early October. Apartment construction continued to increase at a steady pace, and the construction of extended-stay hotels was strong in Dallas. Contacts said the office market continued to improve, especially in Dallas, where a lack of vacant space in the suburban market continues to drive rents upward. Energy High prices continued to boost demand for oil services, and contacts continued to report that there is no excess capacity of equipment or services available anywhere on a global basis. Contacts reported a shortage of land rigs, and said the availability figures for land rigs are greatly overstated "if you want a decent piece of equipment." One contact said that their backlogs are so long that they are not taking any new orders. Agriculture Continued rainfall improved agricultural conditions. Harvest was being completed across the District and most producers were reporting good yields for soybeans, peanuts and corn. Frost damaged some cotton and late-planted sorghum but facilitated harvesting and provided needed relief from bollworms and armyworms. Livestock conditions were rated good overall. Supplemental feeding picked up as cooler temperatures arrived, but hay supplies are good. Return to top Kansas City San Francisco