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Eleventh District economic activity weakened further since the last Beige Book. Many manufacturers reported sales declines. Construction and real estate activity also declined, and the demand for business services was softer. Banking activity slowed, and energy activity was weaker. Retail sales were flat or up slightly. Most contacts do not expect much improvement in economic conditions through the end of the year. Hot, dry weather has hurt crop and livestock conditions.
Prices and Labor Markets
There were many reports of price declines. Energy prices have fallen and are likely to fall further. Both oil and natural gas prices were lower over the past two months. Natural gas inventories have built at unprecedented rates and are on pace to fill before the end of the summer. If so, prices could fall a lot further, according to contacts. Wholesale gasoline prices have fallen 40 percent since late May. National retail gasoline prices are also lower. Fuel and energy costs remain a concern for companies, but to a lesser extent than earlier in the year. Prices have dropped for petrochemicals, including some basic chemicals, such as ethylene and propylene. Prices have also fallen for plastic resins, such as polyethylene, polystyrene, polypropylene and polyvinyl chloride. Airlines are offering major discounts on summer airfares. Business service firms say fees are unchanged or lower than earlier in the year.
Layoffs in several industries have loosened the labor markets. Temporary service firms continue to see a greater number of skilled workers seeking employment. Wage pressures have subsided, but high health insurance costs remain a concern for many firms. Several contacts also expressed concern that stiff competition was containing price increases from their suppliers that could break loose if the competition subsides.
Manufacturing
Manufacturing activity weakened in June and July. Lumber sales continued to decelerate, with a particular drop in demand from retail stores that sell primarily to consumers. Contacts say lumber prices are "rock bottom" low. One contact had closed a plant while another has recently laid off employees. Lumber inventories are in good shape. The paper industry reports a drop in demand and sales have fallen by 10 percent to 30 percent compared to a year ago. Inventories, however, remain in good shape. Demand for food products was unchanged. Apparel producers say demand has been soft.
Fabricated metals producers said sales were strong to the energy industry but had dropped off for non-energy related uses in recent weeks. Demand for primary metals picked up in June, but contacts reported weaker sales in July, with one contact saying "[sales] just evaporated in July." Demand for cement and concrete slowed since the last Beige Book, which contacts attribute to hot weather rather than an overall cooling of the market. Demand for brick and glass has been strong in recent weeks. Sales of glass to the construction industry have been strong but glass sales have weakened to the auto industry. A contact reports that the glass industry has "too many suppliers right now."
Respondents in the high-tech manufacturing sector reported that orders are less negative and appear to be flattening out. Excess capacity remains high and prices continue to decline. Most respondents said they had paired down inventories and current inventory levels are generally healthy. One respondent in the semiconductor industry noted that computers and telecommunications equipment account for about 60 percent of U.S. semiconductor production. He commented that while auto and industrial demand has improved, U.S. semiconductor production will not get much of a boost until there is improvement in computers and telecommunications. Respondents expect orders to remain relatively flat for the next several months and are hopeful they will begin to grow near year-end.
The telecommunications industry continues to contract, with weak sales and large losses. Contacts say there is a lot of pressure to do projects that will make money, but there is no money to spend on the projects, making it "virtually impossible to make any real head way." Both service and equipment companies have taken aggressive measures to get inventories in line, often taking a loss and selling at huge discounts. Previously announced layoffs continue to be carried out while new layoffs are being announced.
Refining margins were strong until the end of June, and then the bottom fell out of the market. Inventories of refined products have reached levels well above their five-year average. Modest demand combined with high levels of domestic production and imports all combined to push inventories up. Several companies announced they are curtailing output to try to stem the glut.
The petrochemical industry continues to struggle with weak demand and rising capacity. One contact said the second quarter was the worst quarter since 1981, with several small producers filing for bankruptcy. Domestic demand remains weak, while foreign demand has fallen -- especially from Asia. U.S. exports for the first half of 2001 were down 70 percent over the first half of 2000. Operating rates are 10 percent to 15 percent under normal conditions for most segments of the industry, and operating rates are in the low 60s for heavy natural gas users, such as ammonia or methanol. The outlook for the industry is grim, with new capacity coming on line as several large new plants are being completed for base petrochemicals.
Services
Demand for business services remains soft, particularly for temporary service firms. Temp firms reported fewer orders from all types of firms, with the largest drop from manufacturing. Law firms, however, say that conditions have improved despite the weak economy. While real estate and corporate activity has been slow, activity to support the energy industry and electric utility deregulation has helped keep firms busy, along with increased bankruptcies and litigation. Accounting firms report activity is slower but still busy, aided by the energy sector. Demand for transportation services has also softened, particularly for airlines, where year-over-year revenues have "fallen off a cliff." Trucking firms say demand has been soft, partly due to the slowdown in high-tech oriented commercial business. Most service contacts were less optimistic about the outlook for activity for the rest of the year, expecting little or no growth in sales, with the exception of bankruptcy lawyers.
Retail Sales
Retail sales were flat or up slightly according to contacts. National retailers reported that Texas sales were not as strong as the rest of the nation. Several retailers noted that consumers are hunting for bargains, and there are not a lot of purchases at full price. One retailer said spending was up as a result of tax rebate checks, which consumers were using to purchase mostly discretionary items, such as electronics. Auto sales continued to pick up from a slow first quarter, and dealers reported stronger sales in June than a year ago. Contacts attributed the sales strength to large incentives and advertising. Auto inventories are in good shape.
Financial Services
Deposit growth continues to slow, and lenders say this has dampened their ability to lend somewhat. Delinquencies and non-performing loans are up, and loan loss reserve accounts have been built up at most banks recently. Although all institutions are seeing slowdowns in all categories, institutions that do business with energy-related companies are the strongest. The Houston area is faring the best, while contacts in the Austin area reports the most negative comments. Medium and small-sized institutions are doing better than larger institutions. Contacts are less confident about the outlook than during the last survey.
Construction and Real Estate
Construction and real estate activity declined in high-tech regions of the state. Residential and non-residential markets have continued to soften, dramatically in some areas. Sales of homes priced above $200,000 have been particularly slow, and some contacts say the market for these homes is overbuilt. Many $1 million homes are sitting on the market. Some contacts reported as much as a 20 percent to 30 percent sales decline from the beginning of the year. Activity remained steady to "brisk" for homes priced below $150,000. Homebuilders are offering incentive bonuses to Realtors who sell homes.
The office markets softened considerably, with a lot of subletting pushing up vacancies. The North Dallas and Austin markets, which have heavy concentrations of high-technology firms, are reported to be the weakest areas, and several contacts expressed concerns about overbuilding in these markets. Office building owners are offering concessions -- as much as 3 months free rent -- to avoid reducing rental rates.
Dallas and Houston apartment markets appear to be in good shape. Apartment rent concessions are almost gone in Dallas, according to contacts. In Austin, however, rents are expected to decline this year. Contacts consider the Austin market to be very overbuilt. One contact said, "it will take a year to reach the bottom and several to dig out."
Energy
Energy activity was weaker. Contacts say firms are reassessing investments, particularly in light of falling natural gas prices. Many producers spent ahead of budget and cash flow in the first half of the year and are now pausing to get back on budget. As a result, demand for rigs has weakened. Utilization rates for rigs are down to 85-90 percent, and rates for rigs are down 10-15 percent. The growing consensus is that domestic drilling activity has probably peaked for now.
Agriculture
With mostly dry weather and temperatures over 100 degrees, crops are rapidly losing potential yield and quality. The Texas cotton crop may be close to last year's drought-reduced level. Drought has cut the crop for three of the last four years. The resulting economic stress leaves few viable crop production alternatives for producers and lenders. Herd reduction increased in drier areas, and supplemental feeding of livestock spread as available pasture grasses continued to decline.
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