October 31, 1990
Economic output in the District is flat to slightly down. Manufacturing activity has slipped, particularly in the construction-related and electronics industries. Most retailers say sales have been flat or declining across a broad spectrum of goods and that they are reducing inventories from moderate levels. Auto sales have fallen. Output in the service sector continues to grow although several sectors have weakened. Construction activity has begun to decline. Higher oil prices have yet to motivate an increase in drilling but indicators suggest growth in the next few months. Falling product prices and increasing energy costs are reducing net farm income.
In general, manufacturing orders and production have declined in recent weeks, but most respondents say that inventories are still near desired levels. Although most product prices are holding steady, some food processors are raising their prices in response to rising transportation costs. Orders for lumber and wood products and fabricated metals have decreased due to declines in construction nationally. Stone, clay and glass producers also note a reduction in orders, although much of this weakness has stemmed from decreased highway construction in Texas. Orders and prices for oil field machinery have increased moderately and producers say the outlook is strong. Electronic producers note falling orders for semiconductors and products related to defense, housing, autos and appliances. Respondents say that orders from the personal computer industry have increased. Output remains strong in the steel industry. Demand for apparel products have declined noticeably. Petrochemical industry production has remained constant at high levels. Product prices for ethylene and plastics have increased only slightly while input prices have jumped, causing margins to be squeezed. Oil refinery profit margins have been volatile, but are significantly lower than earlier this year. Some producers mention declines in gasoline and diesel fuel orders, but others say orders have been flat.
District retail sales have been flat recently with several respondents noting declines. Weakness is widespread across product lines. Retailers report that they are reducing inventories. One respondent said that the current reduction in inventories almost guarantees a slow holiday season. Sales at discount stores continue to be slightly stronger than at other stores. Sales continue to grow in Houston and along the Texas side of the Mexican Border, although growth is slowing.
District auto sales fell in September, dropping 3.5 percent from a year earlier in the Dallas/Fort Worth area and 10 percent in Houston. Respondents say that increased economic uncertainty has caused sales to decline.
Demand for District services continues to increase although it has softened in some sectors. Demand continues strong for consulting services, particularly office automation. Part-time employment agencies say that demand has been steady overall, despite declining placements in the finance, insurance and real estate industries. This weakness has been offset by increases in demand by manufacturers, who are holding their permanent staffs at lean levels. Suppliers of legal services note continued steady demand for bankruptcy services but slowing activity in business litigation. Airlines report declining ridership and large increases in input costs. Increased demand for services and declining property values have financially stressed local governments. Many local governments are finding it hard to increase employment or services, although Houston is hiring workers in several areas.
District construction activity has declined somewhat. The recent weakness has occurred mostly in the non-residential and non-building sectors. Non-building activity, however, continues to increase in Louisiana. The District multi-family sector continues to improve while single-family homebuilding recently has dipped slightly.
Output in the District energy sector is increasing moderately. The continuing crisis in the Middle East is keeping the price of West Texas Intermediate crude near historic highs, around $40 per barrel. One respondent says that the current supply shortfall of 1.1 million barrels per day should support prices of about $25 per barrel, but that expectations of war have motivated a $15 per barrel premium. High price expectations have led to a significant increase in well permit applications in Texas and Louisiana. The rig count is up slightly in Texas, but rig counts are down in Louisiana and New Mexico. While drilling has not increased significantly, many independent producers are increasing well maintenance in order to raise production. If oil prices remain high, major oil companies are expected to increase drilling significantly early next year.
District agricultural incomes will likely be less than previously forecast. Harvest is well underway and yields have been good despite dryness earlier in the year. Operating expenses, however, are above expectations due to increased irrigation and rising fuel and chemical prices. September prices received by Texas farmers and ranchers fell one percent from August, but remained 8 percent above last year's levels. Prices of most crops fell, while the livestock and livestock products index reached a record September high.