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Eleventh District economic activity continued to expand at a modest pace in January and February. Price reports were mixed, with somewhat more downward pressure than reported in the last beige book. Manufacturing remained in a seasonal lull, although energy-related manufacturing was still strong. Demand for business services continues to increase, but most firms reported difficulty meeting demand because of a shortage of workers. Retailers reported �good sales,� with less discounting than at this time last year. The financial services industry reported little change in loan demand. Construction activity increased modestly. Oil service companies continued to report extremely strong and growing demand for their products, despite falling energy prices. Rain delayed agricultural operations but provided need moisture for stock ponds, spring crops and summer forages.
Prices
Price activity was mixed, although there were more falling prices reported than in the last beige book, most notably in the energy industry. After peaking at $26 per barrel in early January, prices for light sweet crude slipped back to $21-$22 by late February. Crude prices were led by falling heating oil prices, which fell from over 70 cents per gallon in early January to under 60 cents by late February. Inventories rose steadily in recent weeks, even as an unusually large number of refineries shut down late in the season for semi-annual maintenance. Gasoline remains in tight supply on the Gulf Coast, and the late start in making gasoline for the summer still leaves some concern about supplies for the coming summer driving season. However, near-term gasoline futures and spot prices have dropped sharply in recent weeks, from over 70 cents to near 60 cents. Natural gas spot prices have also fallen, and inventories are running 19 percent ahead of last year. The paper industry also reported falling prices, where the prices for some products had dropped as much as 14 percent over the last 6 weeks. Electronics manufacturers said prices had stabilized, with the normal downward trend, and inventories were decreasing, but most respondents said inventories are �slightly too big� still. Producers of lumber and wood products expect prices to increase in 2 months. Service sector wages and fees have increased, although most contacts said price increases have not kept pace with rising costs. Escalating office rents concerned respondents in the Dallas area. Petrochemical producers have raised prices for many products, including polyethylene, polystyrene and PVC, boosted by low inventories, strong domestic demand and extremely strong demand from Europe and South America.
Manufacturing
Manufacturing activity remained in a seasonal lull, although energy-related manufacturing was still strong. Demand for brick, lumber, concrete and construction-related fabricated metals was down because rainy weather slowed construction activity, but contacts expect a bounce back will result in �a very strong spring.� The paper industry reported a downturn over the last 30 to 40 days, partly due to a drop in demand, but also because overbuilding created excess capacity. Inventory problems were reported at both the mill and customer levels. Contacts in the semiconductor and computer industry said demand was up over the last six weeks and the past year. Refinery margins remained weak as heating oil and gasoline prices fell faster than crude oil prices. Several refiners continue to look at mergers, restructuring and cuts in capital spending to reduce costs.
Business Services
Demand continues to increase for temporary workers, accounting, consulting and legal services. Contacts cited the high technology sector, commercial lending activity, corporate litigation and a growing economy as the primary sources of strength. However, most firms reported difficulty in meeting demand due to a shortage of workers. One contact said demand had outstripped supply for both consulting and accounting services. Contacts were optimistic about business conditions over the next several months.
Retail Sales
Retailers reported �good sales,� with less discounting than at this time last year. As one contact said: �I hear over and over again that the markdowns went very well.� Contacts reporting the best sales results also noted improvement in sales to Mexican customers. One contact said that sales to Mexican shoppers were showing a �pretty good resurgence,� including evidence of some wholesale buying, although sales were not back to the pre-peso devaluation levels. Inventories are reported to be in good shape. Auto sales were reported to be slower than expected.
Financial Services
Contacts reported little change in loan demand over the last six weeks. Outlooks remain optimistic for all loans types for the rest of the year.
Construction and Real Estate
Construction activity increased modestly. Contacts in several major Texas cities reported that hotel construction picked up strongly over the last six weeks. In addition, increasingly tight office markets across the state continued to boost office rents and plans for new office construction. Demand remained strong for industrial space, but some respondents continued to report that new supply was outstripping demand. The pace of single-family home construction has slowed, but some of the slowdown may be seasonal and/or due to extremely wet weather in February. Contacts are optimistic that 1997 will be a good year for residential construction, but most doubt they will match the high level of new home construction recorded in 1996.
Energy
Oil service companies continued to report extremely strong and growing demand for their products, despite falling energy prices, which had been anticipated. The normal seasonal dip in the rig count all but disappeared in early 1997, with the rig count quickly returning to year-end levels of drilling. Shortages of selected oil-field skills continue, and the industry continues to hire to meet current high levels of demand.
Agriculture
Rain delayed land preparations and planting operations but provided needed moisture for stock ponds, spring crops and summer forages. Livestock conditions remained good across the state and many auctions continued to report higher prices.
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