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The Eleventh District economy continued to expand at a modest pace in May and early June. Reports suggested that labor markets had tightened since the last Beige Book, pushing up wages, but price reports were mixed. The strongest economic growth was reported by business service firms and in the energy sector. Growth of sales in manufactured products was up slightly, and construction activity continued to grow at a modest rate. Retailers said sales growth had downshifted since the last Beige Book but was "not terrible." Demand for financial services was unchanged, but contacts expressed concern about an oversupply of loanable funds. Agricultural production was hampered by excessive rainfall.
Prices
There were more reports of upward price and wage pressures than in the last Beige Book, but there were reports of lower prices as well. Labor markets tightened in most industries, including those for engineers, software designers, retail workers, truck drivers and support staff, such as secretaries. Wages were up for some workers, particularly in the service and energy sectors. Office rents were up 20 percent over year-earlier levels, and land prices rose for industrial and office locations. Oil prices increased from between $19 and $20 per barrel for most of April to between $20 and $22 in May. Natural gas and heating oil prices were also higher, as late-spring cold weather reversed normal seasonal trends. Natural gas storage was only 35 percent full, which is expected to help support prices through the summer. Gasoline prices rose steadily over the past six weeks, boosted by low inventories and a heavier than usual maintenance schedule for refineries. Producers of polyethylene and polyvinyl chloride boosted selling prices in April, but the prices of both are expected to fall this summer when new ethylene capacity comes online because both contain a significant amount of ethylene. Lower ethylene prices also are expected to be passed through in a number of other plastics products. Telecommunications manufacturers reported that competition had pushed down prices. Prices of scrap metal were lower, but there was some feeling that this was a result of customers' building too much inventory and therefore only temporary.
Manufacturing
Sales growth of manufactured products was up slightly. Warm weather boosted demand for construction-related products, although contacts noted that sales were below last year's "gangbuster" levels, and some inventories were too high, such as for cement and brick. Sales of paper and apparel products were up since the last Beige Book, but paper sales were slower than last year. Worldwide demand for computers remained strong, particularly for higher end products, but supply constraints for the newer and more sophisticated semiconductor components and microprocessors limited sales growth. Some contacts mentioned growing inventories of some PC components, but other contacts said inventories were still in good shape in the United States. Some electronics contacts were concerned that sales growth will be less than expected this year but said, "It's hard to tell if there is softening in the U.S. market." Telecommunications manufacturers said seasonal factors slowed demand growth. Refiners maintained good margins but expressed concern about the industry's long-term profitability given its excess capacity. Demand for gasoline is expected to be strong this year. Petrochemical demand remained strong and olefins margins were healthy, but new capacity coming online over the summer is expected to put downward pressure on ethylene and polyethylene prices.
Business Services
Business activity continued to increase for legal, accounting and temporary-employment firms. The energy, real estate, technology and financial services sectors were cited as sources of strength for business service firms, which recruited both professional and clerical workers heavily and with difficulty. Wages and salaries were higher at business service firms, and fees were also up. The outlook among these firms was positive, with continued growth, but some respondents felt a sense of caution that things have been growing so quickly and must, at some point, slow. As one legal contact said, "Things have been too good for too long."
Retail Sales
Retailers said sales growth had downshifted since the last Beige Book but was "not terrible." Nearly all contacts commented that sales did not meet expectations. Sales of seasonal items were particularly slow. Excess inventory was a problem for some retailers, leading one to cancel purchase options and another to characterize inventory as on the "upper side of O.K." More retailers reported hiring difficulties than in the last Beige Book, pushing up wages at some stores. As one contact commented, "It is getting harder to find anyone who can add, talk and run a cash register for $6 an hour." Auto sales remained "good" in most major cities but continued to trend down in Dallas and Fort Worth. Dealers in the D/FW area said they appear to be overwhelmed with supply.
Financial Services
Demand for financial services was unchanged over the last six weeks, although contacts expressed concern about an oversupply of loanable funds. Contacts said steep competition had pushed down interest rates and led to a relaxing of credit requirements for loaned funds. In spite of increased competition, however, delinquency rates did not rise over the past six weeks. Virtually all respondents reported hiring employees or open positions at their institutions.
Construction and Real Estate
Construction activity continued to grow at a modest rate, but contacts said that demand for most types of real estate was stronger than expected. High occupancy rates in the suburbs stimulated office demand in the commercial business districts, although contacts were cautious about overbuilding. Construction of speculative warehouse space continued. Apartment construction remained at high levels, with continued concerns about overbuilding, especially in Austin and parts of Houston. Retail activity was brisk, with increased demand and absorption in the Dallas and Houston markets. Housing growth rates remained below last year's.
Energy
Energy activity remained extremely strong. Contacts continued to report that utilization rates for drilling rigs in the Gulf are at 95 percent or higher, and would be higher yet if not for maintenance schedules. At current energy prices, cash flow is strong at oil service companies, and the return on investment is "phenomenal," creating a rush to get wells drilled. Bottlenecks continued to be created by shortages of key personnel, such as machinists, engineers, ship captains and crews, as well as of drill pipe and many types of equipment.
Agriculture
Although recent warm weather has improved conditions, above-normal rainfall slowed growth of corn, milo and cotton across the district and substantially reduced the vegetable crop in Texas' Lower Rio Grande Valley. Persistent wetness on range and pastures also reduced weed control and fertilization operations, although livestock conditions continued to be good.
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