September 19, 2001 Federal Reserve Districts Eleventh District - Dallas

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Eleventh District economic activity continued to weaken in August and early September. Manufacturing, construction and real estate activity continued to decline. Demand remained slow for most business services, and contacts in the financial services industry reported a gradual softening of conditions. The energy industry also slipped a little. Retail sales were slightly improved, but still weak. The agricultural industry has been hammered by another hot, dry summer. Prices and Labor Markets There were more reports of price decreases than price increases. Most manufacturers said selling prices were unchanged or lower, and some expect softening demand to push prices down further in coming weeks. Many manufacturers reported that inventories have fallen to acceptable levels, except for some construction-related products and telecommunications where inventories are high. Telecom firms say older inventory is becoming obsolete as new products and technologies become available. Telecommunications firms say input costs are falling but not as fast as selling prices. Most service contacts reported little change in fees. Airlines say fares are lower. Retailers said selling prices were unchanged or down, and one noted that customers are tending to purchase the item with the fewest features and the lowest price. Several industries noted that the fall in natural gas prices has been beneficial, and energy surcharges for natural gas have been eliminated or reduced. Cool weather, weak industrial demand and rising inventories pushed the spot price of natural gas down from $3 per thousand cubic feet in late July to $2.30 just before Labor Day, the lowest price for natural gas since December 1999. Downward pressure is expected to continue until the first cold weather hits the Northeast, perhaps in two months. Crude oil prices held between $26 and $28 per barrel despite the slowest growth in global demand since the 1997-98 Asian financial crisis. Supporting crude prices was OPEC's announcement that it would remove one million barrels per day of production from the market beginning September 1. Gasoline prices have increased since the last Beige Book because of a series of delivery problems in the refinery system. U.S. demand for gasoline has been surprisingly strong in August, reaching nearly 10 million barrels per day, the strongest demand in 22 years. Labor markets continued to loosen, and layoffs are still reported. As a result, many firms say hiring is less difficult and the quality of the workers has improved. Turnover has also decreased, which is improving productivity according to one contact, because workers have more experience. Another contact remarked that people are "holding on for dear life" to their current jobs. While only a few industries reported wage pressures, several expressed serious concern about rising health care costs. Manufacturing Manufacturing activity continued to decline. Some high-tech firms reported a slight improvement, but demand for construction-related materials and oil field equipment have begun to soften, and the outlook for these producers worsened. Cement producers reported slowing demand over the past six weeks, with particular weakness in Austin. Brick shipments remain at high levels but bookings for new jobs are down, and backlogs are shrinking. Glass producers reported softening demand for construction but a pickup in sales to the auto industry. Sales of metals--both primary and fabricated--has slowed, and contacts reported a drop off in new orders to supply all types of industries, including parts used by the energy industry. Lumber sales continued to decline, and contacts say their customers are becoming quite apprehensive about the future. One contact closed a plant and is having difficulty selling off the inventory. The paper industry continues to report slow sales, with shipments and orders below last year's levels. Producers are running their plants as much as 15 percent below capacity. Demand for food products was mostly unchanged, and apparel producers said that sales were below the levels of a year ago. The high-tech industry is mixed with some contacts saying they are gaining confidence that the bottom has been reached. These contacts report that demand has flattened in the past three to four weeks, and inventory levels are very lean. Respondents do not expect any significant uptick in demand until at least the first quarter of 2002. On the more negative side, personal computer manufacturers report that sales and prices continue to fall. Telecommunications contacts reported that demand for networking equipment and services has not improved and may have slipped further. Revenues in the telecom industry are well below previous years, according to contacts, who say capital spending has dried up. The combination of supply disruptions and strong demand has improved refinery margins, but only to moderate levels. The decline in the price of natural gas has helped the competitive position of U.S. chemical producers relative to the rest of the world, particularly as the price of oil has remained well over $20 per barrel. However, weak domestic and foreign demand for chemicals, plus new capacity that has come on line around the world has kept chemical prices very weak. The contract price for ethylene suffered the biggest decline ever (two and a half cents) in July, as producers were unable to maintain improved margins as the price of gas fell. Further downstream, the price of plastics, such as polyethylene and PVC fell along with the price of ethylene. Profits along the entire supply chain remain stable, but at very low levels. Services Demand continued to be slow for most business services, but there have been signs of improvement. Temporary firms say that activity is slow but has not worsened since the last Beige Book. Legal contacts also reported little change in overall levels, which are slightly lower than a few months ago. However, slower transactional work has been replaced by a pick up in bankruptcies. Demand for transportation services remains soft. Airlines continued to report a sharp slowdown in business travel. Trucking firms reported somewhat slower demand, partially because of fewer high-tech shipments. Railroads say activity remains slow but has moderately improved since the last Beige Book. Shipments of energy-related commodities, such as coal, have been especially strong. Shipments of international containers are up, while domestic intermodal shipments are down. Retail Sales Retail sales were slightly improved, although still weak, according to contacts who say their profits were down. Discount stores reported better sales results than other retailers, and one contact concluded that customers are gravitating toward value. Sales along the Texas-Mexico border were strong, but sales in Austin and the Dallas/Fort Worth area were poor. Auto sales were "good" but lower than a year ago. Auto inventories are slightly above desired levels, keeping pressure on selling prices. Retail sales in Houston remained strong, with particularly strong auto sales, which contacts attribute in part to replacing damage caused by Tropical Storm Allison. Financial Services Respondents continued to report a gradual softening of conditions. Deposit growth has slowed as interest rates have fallen. Loan demand is continuing its slowing trend, except in the Houston area where loan demand remains strong. Contacts say that weakening demand is driving down margins. Most contacts expect the economic slowdown to impact their business throughout the remainder of this year and do not see real recovery until the second half of next year. Construction and Real Estate Overall construction and real estate activity continued to deteriorate. Real estate markets are particularly weak in Austin. Commercial markets are overbuilt in Dallas and Austin--the district's high-tech areas--where weak demand and a lot of sublease space are putting downward pressure on rents. However, a few contacts report that sublease space is being announced at a considerably slower pace over the past six weeks. High-end residential housing markets remain weak, with the market above $250,000 still considered overbuilt. Home sales in the lower price points remained strong, but contacts say sales are taking longer and the cancellation rate has increased. Builders say they have lowered prices to retain sales volumes, reducing their margins. Some contacts report fewer corporate relocations to the area compared to past years. Multi-family activity is "amazingly strong" in Houston and stable in Dallas. Houston office and residential markets are still very strong. Energy The domestic rig count declined slightly from 1275 in late June and July to about 1250 working rigs. Most of the decline came out of gas-directed drilling, and probably half of that from reduced offshore activity in the Gulf of Mexico. The result has been reduced rates for these rigs. The rig utilization rate for oil-directed North Sea rigs has risen to 100 percent, however. Oil services and supply boats report that there has not been enough of a decline to adversely affect the demand or pricing for their services. Agriculture Hot, dry weather has battered crops and livestock. Recent rains, while beneficial in some areas, were mostly too little and too late to help many of the failing crops. Texas cotton producers have abandoned nearly 2 million of the 6.2 million acres planted. This is the fourth year out of the last six years that drought has cut the Texas crop. Rains helped pastures and ranges and replenished stock ponds in many areas. However, some areas received very little or no rain and remain dry. Supplemental feeding of livestock continued in many areas. Return to top Kansas City San Francisco