January 14, 2009 Federal Reserve Districts Eleventh District--Dallas

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Economic conditions in the Eleventh District continued to weaken from mid-November to year-end 2008. Contacts across a broad range of industries noted reduced demand and uncertainty about the outlook. Manufacturing, commercial construction, energy and transportation services generally reported the largest drop in demand while residential construction remains at low levels. Accounting and legal services seemed to hold up the best although they reported that demand was flat to slightly down. Bank lending declined due to tighter credit and weaker loan demand. Most respondents don't expect conditions to improve until the second half of 2009 with a growing number of respondents now looking at early 2010. Prices In general most service firms reported no change in prices while most goods producers reported declines. Many manufacturing respondents noted that while energy costs have come down, lower capacity utilization rates have put upward pressure on per unit production costs. Retailers reported large discounts were needed to move merchandise over the holiday season. Many contacts reported that fuel surcharges for transportation that were instituted earlier in 2008 were being dropped. Light sweet crude oil fell to $37 per barrel by year-end, the lowest price since 2004, from $55 per barrel in mid-November. Contacts said a huge over-supply of crude oil driven by the US and global slowdown led to the decline and that consecutive cuts by OPEC were not sufficient to stem the decline. Oil product prices fell as fast as crude oil, leaving refiner margins weak. On-highway prices for both gasoline and diesel fell by about 50 cents per gallon since the last survey and natural gas prices declined by about a $1 per Mcf from $6.50 per Mcf in mid-November. Labor Market Labor markets remained weak as most contacts reported that they had maintained or reduced employment since the last survey. Labor markets were weakest in manufacturing where many firms extended temporary plant closings or reduced operating hours. Many manufacturing contacts reported that they had laid off temporary or hourly workers and that they are likely to reduce full-time staff at the start of the year. Layoffs were becoming widespread in the energy industry, and they are expected to grow in 2009. Many contacts reported hiring freezes and reported little if any wage increases. Manufacturing Most manufacturing contacts reported declines in demand and reductions in capacity utilization. Most contacts said that they have managed to keep their inventories at desired lean levels but an increased number of contacts reported that inventories had risen to higher than desired levels. Construction-related manufacturers reported continued declines in shipments and orders even after adjusting for normal seasonal reductions. Most producers reported reductions in jobs and expect further cuts in early 2009. Some contacts noted that the recent plunge in commodity prices provided only slight relief in the cost of production since capital costs per unit of output have increased as capacity utilization has declined and because pricing on rail and truck transportation and coal have not fallen due to long-term contracts. Contacts continue to report that demand from commercial construction is shrinking rapidly with the main exception being government sponsored projects. Contacts reported that the outlook has gotten worse and most do not expect a turnaround until late 2009. Most respondents in high-tech manufacturing industries report that demand has fallen moderately since the last survey. Weakness was widespread across global markets and products. Most firms said that they were planning to reduce employment over the next several months. Respondents reported lean inventories, although one respondent said the recent reduction in demand from Asia had caught them off guard and that they were working aggressively to reduce inventories. While one respondent noted that their factories were running at only 40 to 45 percent of capacity, another respondent said that the current downturn is not nearly as bad as the high-tech recession in 2001. Most respondents expect some improvement in demand sometime in the second half of 2009. Paper manufacturers reported continued declines in production and orders. Demand for corrugated paper used for boxes and packing material has fallen sharply. Contacts noted that this is a reflection of the overall weakness in manufacturing as producers of a wide range of products are shipping less output. Noted exceptions to the weakness are food processors, where contacts suggest that their industry remains recession-proof. Respondents reported that while margins for gasoline were particularly weak, refinery capacity utilization held steady at about 85 percent. Respondents in petrochemicals and derivative plastics said that demand and prices have fallen sharply since the last survey. The decline in demand stemmed from declines in domestic housing, autos, and general manufacturing activity, as well as export markets. At least 10 large plants have shutdown on the Gulf Coast in recent weeks, and others have cut runs. Layoffs have been widespread among firms and their contractors. Retail Sales Almost all retailers reported weak holiday sales. The weakness was broad-based and included discount stores. One contact noted that it was the worst holiday season for his company in 38 years. Weakness was broad-based across department store products but contacts noted particularly sharp declines in demand for jewelry and men's clothing. A contact with stores throughout the District said that year-over-year sales declined the most in Dallas and the least in Houston. Department store contacts expect demand to be weak throughout most of 2009. Auto dealers report that sales and traffic continue to fall from already depressed levels. While domestic brands have been hit the hardest, contacts report that recent declines have been broad-based across all vehicle brands. Respondents report that manufacturer incentives are ample but that they are not having as much impact as in the past. One respondent said that in order to reduce his inventory, he likely will not order any new vehicles until February. A bright spot is used car sales and repair services which have increased slightly since the last survey. Most contacts expected very weak new vehicle sales at least though the first half of 2009. Contacts are hoping for some improvement in the second half of the year but are cautious since the outlook remains very uncertain. Services Staffing firms report that demand remains sluggish. Most contacts report that there is little demand for permanent hires. Although their customers are keeping many short-term contract positions, they are not adding new positions. Contacts said that demand has been reduced by temporary plant closings, many of which have been extended due to weak demand conditions. Contacts report that some staffing firms are beginning to lower rates to remain competitive and retain market share. Accounting and legal firms report that activity was flat to slightly down since the last survey and that receivables are getting slower and harder to collect. Legal firms reported new real estate projects have dropped off sharply and that many projects are being put on hold for an indefinite period of time. International business has also declined. Offsetting this has been an increase in litigation and bankruptcy services. Airlines report that demand continues to weaken and that it is likely to continue to fall over the next six months. Respondents in container cargo and intermodal trade report a sharp drop off in activity since the last survey due to declines in international trade volumes. Intermodal transport services also noted a decline in demand. Shipping companies reported that the largest declines in volumes have been to retailers although consumer shipments have also weakened. Construction and Real Estate Housing conditions in the District remain very weak, according to respondents. Home sales have fallen considerably since credit conditions tightened, and respondents report that traffic remains nearly nonexistent. Contacts reported that cancellations remain prevalent, in some cases outpacing sales. Median home prices have edged down but have avoided the double digit declines prevalent in other areas of the country. Respondents say that compared to other areas in which they do business, Texas continues to fare better despite the poor conditions. District respondents said apartment demand fell over the survey period. New construction added units at the same time move-outs increased, leading to increases in vacancy rates. Commercial real estate transactions--both leasing and investment--have ground to a halt. Contacts reported "nothing is going on". Outlooks remain uncertain, although one contact noted scattered signs of optimism, with people talking of possible opportunities in 2009. Financial Services Financial services contacts in the District continued to report a slowdown in loan demand. Contacts reported that real estate deals were basically nonexistent except for the very low risk ones. Most contacts have seen a slight deterioration in credit quality, but quality is still stable overall. On some loans, contacts have increased the interest rate by methods such as basing spreads off the LIBOR rather than the prime, and setting a floor on the prime. Depository institutions report maintaining tight credit standards, and most report generally stable deposits. The slowdown in loan demand has been broad-based. Demand has decreased for mortgages and consumer loans, particularly auto loans and credit card issuance and purchase volume. Real estate lenders are very concerned about 2009 while other lenders expect either flat or very modest growth. Energy Oil services and machinery contacts reported that drilling activity has declined in response to lower energy prices. The U.S. rig count slid by 15 percent, or 300 rigs, from the peak in August, with two-thirds of the decline coming in the last six weeks of the year. Texas is down 157 rigs since the peak, and 85 rigs of this decline have come in the last six weeks. Contacts reported that the brunt of the decline is land-based and natural- gas directed. Relatively expensive shale and tight gas led the upturn, and is now leading the downturn as well. Contacts said that offshore and international activity has held up much better, and should continue to do so, based on sponsorship by companies with a longer-term perspective and much deeper pockets. Agriculture The cotton harvest is about 85 percent complete, and yields are lower than expected. Regions in Central Texas are suffering from a severe dry spell. The winter wheat and oats crops and pastureland are in need of rain in most parts of the District. Livestock are in fair condition but supplemental feeding is ongoing due to lack of pasture. Commodity prices have plunged from their earlier peaks but fertilizer prices have not declined as much, leaving farmers with low winter crop prices and high planting costs. Return to top Kansas City San Francisco