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Eleventh District economic activity remained weak in late-February and March but showed signs of improving in the first half of April. Contacts remain cautious about the outlook. Manufacturing activity and retail sales continued to be weak but also showed signs of picking up. Construction and real estate conditions remain weak, and energy production activity continues to decline despite higher oil and natural gas prices. There was little change in financial conditions. Agricultural conditions are dry, and selling prices for major crops are below the cost of production.
Prices and Labor Markets
Energy prices have increased sharply since the last Beige Book, leading many industries to express concern about rising costs. Oil and natural gas prices are significantly higher. Gasoline prices are up 20 percent over the past 6 weeks as strong demand and limited production reduced inventory at a time that the industry is normally building inventory for the summer. Rising feedstock prices and sporadic outages of key facilities have boosted petrochemical prices. Prices are up for petroleum-based packaging products, but competition is limiting producers' ability to pass along cost increases.
Soaring prices for all types of insurance remains a concern for all industries. One contact suggested that the significant increases in worker's compensation and employee health insurance premiums was discouraging business owners from expanding their payroll.
Layoffs appear to be subsiding, and there are a few reports of hiring or longer work hours. Contacts say that it is a good time to pick up quality workers at a relatively low cost. However, several contacts said uncertainty is restraining hiring.
Manufacturing
Manufacturing activity is showing signs of picking up. Sales were slightly higher for many high-tech products. Semiconductor manufacturers say there are continued signs that a recovery has started, but a recent pause in activity has made them less sure about its strength. Computer sales to consumers and businesses remained sluggish. Sales of consumer electronics, other than personal computers, were reported to be growing at a healthy rate. Most respondents said that inventories remain very tight, but one contact noted a pickup in semiconductor inventories might be a problem if sales are weaker than expected in the second half of the year. Telecommunications contacts say their customers continue to delay capital spending, postponing hopes for the industry's recovery.
Lumber sales have picked up in the past few weeks, mostly due to renewed strength in residential construction and remodeling. Reduced capacity in the lumber industry has added to an improved industry outlook. Demand for metals is down, particularly for construction-related metals. Producers of cement, concrete, brick, tile and glass reported little change in demand over the past six weeks, with some increase in activity due to favorable weather conditions.
Food manufacturers say demand is down from three months ago but unchanged over the past few weeks. Food producers expect demand to pick up because they believe their customers inventories are low.
Paper producers said demand has picked up some in the Dallas area, but sales remain below the levels of a year ago. Demand for apparel products also increased, which contacts believe is mostly due to retailers increasing their inventory levels. The apparel industry continues to reduce costs by shifting operations out of the United States. Several apparel plants in Texas have already shut down, two are slated to close in August and there was a recent announcement of another facility closing in October.
Demand for petrochemicals has increased but profit margins remain thin. Customers reduced their inventory when prices were falling, but rising costs have pushed up selling prices and extensive inventory restocking throughout the supply chain is boosting orders.
Refiners cut back production and extended maintenance programs in the first quarter in response to very weak profits. Capacity utilization fell below 90 percent in March but has started to increase over the past couple of weeks in response to higher profit margins.
Services
Demand is showing signs of increasing for most business services. Temporary staffing and other business service firms say demand is picking up, thanks to growing activity from manufacturers. Legal contacts reported a slight increase in demand, especially for litigation and bankruptcy activity. Transactional and real estate activity is steady, while activity is slow for corporate financing, mergers and acquisition.
Demand for transportation services continues to "drag along bottom, well under water." Respondents are "very cautious looking ahead" because overall demand remains depressed and costs are higher than a year ago--notably for fuel and to finance larger debt.
Retail Sales
Retailers said that sales showed signs of improving but the level of sales remained weak. Consumers continue to be cautious, according to contacts. Auto sales were slower than in previous months. Contacts continue to be pleased with sales levels but expressed concerns that rising interest rates will dampen sales.
Financial Services
Financial service contacts reported little change in activity. Lending and deposit levels are mostly unchanged, with a few contacts reporting increases. Credit standards were unchanged since the last report, according to bankers, but competition for C&I loans remains stiff, particularly in Houston.
Construction and Real Estate
Construction and real estate conditions remained weak over the past few weeks. Overcapacity and weak demand plague office markets. The opening bid for office space in downtown Dallas includes 12 months free rent, and effective rental rates have declined 40 percent or more in many areas, according to contacts. Special financing and other incentives helped spur sales, particularly for new homes priced below $150,000. Sales of higher priced homes remained sluggish, however.
Energy
Drilling activity continues to decline despite sharp increases in oil and natural gas prices. Declines in gas drilling continue to lead the loss in activity. Although some customers are expressing interest in future activity, others are simply using the increased prices to repair their balance sheets before moving forward with any new drilling projects.
Agriculture
Agricultural conditions remain dry, particularly in the southern portion of the District. Some replanting has occurred in recent weeks because small grain crops were damaged by a lack of moisture, frost damage and bug infestation. Selling prices are at levels "far below" production costs for major crops, according to contacts, who say producers are dependent on government payments and the next farm bill. While there were reports of some improvement in the livestock market.
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Kansas City