November 27, 2002 Federal Reserve Districts Eleventh District - Dallas

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Overall Eleventh District economic activity appeared to be unchanged or down slightly in late October and the first half of November. Contacts continued to indicate that uncertainty is affecting their business decisions, and many respondents do not expect a pickup in the economy until next year. Overall manufacturing activity was down slightly, and activity in the service sector remained weak. Construction and real estate activity continued to be soft. There was little change reported in the energy sector or the financial services industry. Automobile sales were down in early November, but other retail sales rebounded from a very weak September. Agricultural conditions were mostly favorable. Prices and Labor Markets There were more reports of price declines than price increases since the last Beige Book. Crude oil prices remained near $30 per barrel through mid-October then weakened steadily to near $25 per barrel in early November. U.S. crude inventories are low, and contacts say prices declined because the war premium has fallen. Natural gas inventories are at record levels, and prices have weakened to under $4 per thousand cubic feet. Prices declined for polyethylene and PVC, but prices were unchanged for other chemicals. Selling prices were flat to down for most construction-related manufactured products, with intense competition expected to continue putting downward pressure on prices. Cement producers said prices are down 15 percent from a year ago. Selling prices for reinforced steel were down and at very low levels, according to producers. There continues to be downward price pressures on real estate. In Dallas, according to contacts, some ten-year leases include two years free rent. Homebuilders report heavy use of price incentives. An Austin builder said a $180,000 home could come with as much as $15,000 of free upgrades. In contrast with most other sectors, contacts continue to report rising prices for all types of insurance. The labor market remained soft. There were reports of continued layoffs or failure to replace attrition in the manufacturing sector. Firms that supply temporary workers say wages are unchanged or slightly down from last year. Legal firms say salary increases are expected to be smaller than usual. Manufacturing Overall manufacturing activity was down slightly over the past few weeks. Demand continued to decline for most construction-related manufacturing products, including wood products, fabricated metal products, brick, and cement. The drop in sales was the result of continued slowing in commercial and residential construction, according to contacts who noted a very high level of competition for fewer and smaller projects. Inventories were rising for some metals products. Paper producers said sales declined more than expected. Orders for high-tech manufactured products were flat to slightly up, but employment levels continued to shrink. Contacts were slightly more optimistic than the last report because some leading indicators of future orders picked up in the first two weeks of November. Inventories of most products were lean, they said, although stocks of some final products are high. One respondent noted that a significant pickup is unlikely because excess capacity will likely restrain business capital investment. Demand for gasoline has been strong and refineries have been "running very hard" in the last few weeks. Refiners reported improved margins, as product prices generally rose more rapidly or fell more slowly than crude prices. Demand for petrochemicals was still weak, according to producers who say that the recovery in chemicals that seemed to be under way for much of the year has stalled. Services Activity in the service sector remained weak. Firms that supply temporary workers continued to report slow improvement. Legal contacts reported steady growth in litigation, bankruptcy, and real estate activity. But legal firms said there is still no demand for transactions work, and they were more pessimistic about the outlook for this type of work. Transportation services remain at very weak levels, according to contacts. Airline travel is very sluggish, particularly for business. Holiday travel bookings seem to be weaker than the past two years, and travelers appear to be taking trips of shorter duration. Retail Sales Retail sales picked up modestly in early November, but sales growth remained soft compared to a year ago. Retailers expressed concern that the holiday selling season--between Thanksgiving and Christmas--will be a week shorter than last year. Competition continues to put downward pressure on prices. Automobile sales are down. Dealers say it is very difficult to get customers into showrooms, and they are very concerned that recent rebates and financing incentives have "stolen sales from the future." Trade-in prices on used vehicles have fallen dramatically because there is a flood of one- and two-year old vehicles coming in off leases. Insurance costs are also affecting the ability of typical buyers to purchase a new vehicle, dealers say. Financial Services Overall lending activity is described as flat to mildly positive. Consumer lending was the weakest category, and mortgage refinancing remained the strongest. Deposit growth was still strong, especially at smaller banks and credit unions that focus on consumer accounts. Contacts expected continued loan and deposit growth, but net income is expected to be flat. There were no significant changes to charge-offs or delinquencies reported. Construction and Real Estate Construction and real estate activity remained weak. Contacts said office-leasing activity increased slightly, but noted the rise was the result of "bottom feeders" and aggressive subleasing as opposed to an improvement in the market conditions. Homebuilders continued to sell a lot of low-priced products, but traffic is down and cancellations are commonplace, they say. The overall multifamily segment will "get worse before it gets better," according to contacts. Energy Overall energy activity was unchanged. U.S. drilling has stayed near 850 working rigs for the past 26 weeks, with a shift from gas-directed drilling to oil-directed drilling in recent weeks. Offshore activity is also in the same pattern of no significant change, with both the level of activity and day-rates for rigs reported as stable. There was some improvement in the demand for services and machinery for international activity. Respondents see no signs of improvement this year but are more optimistic about early next year. Agriculture Agricultural conditions continued to be mostly favorable. Rainy weather delayed field operations, but producers are pleased with the cotton harvest and the outlook for the winter wheat crop. Return to top Kansas City San Francisco