December 7, 1994
Economic activity continued to rise at a solid pace, although contacts in several industries expect activity to soften in the new year. Manufacturing orders increased, while activity at business service firms accelerated slightly. Retail sales were sluggish but strengthened over the Thanksgiving weekend. Higher interest rates and economic uncertainty tempered growth in the construction industry, although activity is said to be strong overall. Loan demand was stable. Steady demand kept district energy activity unchanged, while excessive moisture and a late frost disrupted agricultural production.
Scattered price and wage pressure continued to be reported in manufacturing and services, but retailers said selling prices were lower. Rents were up for some types of property, but home prices stopped increasing despite higher costs for several inputs. Energy prices were up slightly, and agricultural prices were lower.
Manufacturing orders continued to increase at a solid rate. Demand was strongest for electronics, paper, food and petrochemicals. Declining housing starts slowed orders for construction-related products such as brick and lumber, but producers said they were still operating at capacity. Inventories were low for many electronics products, and manufacturers said that hiring had led to slight wage pressure, but selling prices continued to decline. Sales of industrial electrical products were extremely strong, partially because of rebuilding after floods in the Houston area. Orders for paper products were still strong, although a lack of storage space had reduced double ordering. Most paper contacts said they were still producing at capacity, and higher costs pushed up selling prices. Demand for fabricated metals was unchanged, while orders were slightly lower for primary metals. Primary and fabricated metal producers reported low inventories because delayed rail shipments had caused shortages of raw materials. Rising apparel sales resulted in some hiring, but garment finishers continued to report declining demand. Demand for oil field services and machinery was unchanged, but contacts said cost cutting had increased profits. District refining was returning to normal following a break in the Colonial pipeline. The pipeline break improved profits briefly, but higher fuel oil prices and a seasonal decline in gasoline sales kept overall refiners margins weak. Demand for petrochemicals was extremely strong, and the industry had not completely recovered from the fire and flood on the San Jacinto River, which reduced capacity and led to a fifth round of price increases in 1994. Inventories were very low for most petrochemicals, particularly propylene. Capacity is being added as quickly as possible, although shortages of capital equipment are reported to be limiting expansion.
Economic activity at business services firms increased at a slightly faster rate. Accounting, temporary and legal firms reported an acceleration in demand, while demand at transportation firms continued to grow at a moderate rate. Demand for corporate legal services, such as mergers and initial public offerings, continued to increase. Labor market tightness in technical and professional fields, such as programming, engineering and word processing, resulted in wage and price increases in the temporary help industry. Trucking, accounting and communications firms also reported higher wages.
Retail sales were soft in early November, but gained strength over the Thanksgiving weekend. Most contacts said weekend sales were good but not great. Retailers expect good sales over the holiday period. Contacts report that price competition heated up in the past month, and selling prices remain lower than a year ago. Auto sales declined seasonally in October, but remained above a year ago.
Overall loan demand at district banks is reported to be unchanged although higher interest rates have curbed demand for construction loans, particularly for residential mortgages. Consumer and business lending continues to expand, and continued competition from alternative credit sources is limiting increases in loan rates.
Construction activity remained strong, but higher interest rates and economic uncertainty led several contacts to revise their outlook downward. Commercial and retail construction was strong, although respondents said economic uncertainty caused some projects to be put on hold. Demand for office, retail and industrial space was strong, and rents moved up slowly. New home sales and starts dropped in October and November. Contacts said new single-family home prices stopped increasing, and median existing home prices had fallen. Labor shortages are still reported for some subcontracting trades.
Steady demand kept district energy activity unchanged. The rig count increased seasonally, but remained below last year's levels. Most drilling continued to be for natural gas, although oil drilling was up slightly. Oil prices were between $17 and $19 per barrel, which was slightly higher than the last beige book. Spot prices for natural gas remained at low levels, between $1.55 and $1.60 per mcf. Storage capacity for natural gas is 94 percent full.
Rainy weather, flooding and a late frost slowed the agricultural harvest. Producers said delays had increased costs. Lower crop and livestock prices pushed the October Texas All Farm Products Index of Prices Received down 8 percent from 1993's level, and 2 percent lower than last month.