January 18, 1995
The Eleventh District economy continued to grow at a solid pace in late November and December. Increasing strength was reported in the service sector, and manufacturing orders continued to rise at a steady rate. Strong commercial construction activity offset a further decline in the single-family sector. Retail sales growth slowed after the Thanksgiving holiday and Christmas sales were lower than expected. Growth in loan demand continued at a strong pace, but competition between banks for customers squeezed margins. District energy activity remained unchanged but was slightly below last year's levels. Year-end agricultural production was up.
Contacts in several manufacturing industries, including petrochemicals, paper and steel, reported price increases resulting from strong demand. Apparel and food contacts said that higher costs-especially for packaging-were raising price pressures in their industries. Service sector respondents reported continued wage and price pressures resulting from labor shortages and strong demand. Retailers said competition kept prices at or below last year's levels. Oil prices held steady, but warm winter weather depressed natural gas prices. Sharp declines in livestock prices led to a decline in a regional index of agricultural prices.
District manufacturers reported continued growth in orders with strong growth in the demand for paper products, electronics, apparel and chemicals. Orders increased modestly for construction-related products. Domestic and foreign sales of packaging materials, boxes and paper products continued to rise. Prices were up for all types of paper products and contacts expected further price increases in 1995. Despite additional capacity, electronics orders outpaced supply leading to lower inventories. Electronics prices were reported as no longer falling, resulting in higher profits for manufacturers, A December surge in orders for jeans led to hiring in apparel manufacturing. Demand for construction-related products edged up. Lumber producers reported lower sales of residential lumber but increased orders from commercial builders. Demand for concrete and cement increased with improving weather. Glass sales were at a record high due to rising commercial construction and robust auto production. Orders for primary and fabricated metals accelerated, and producers reported that demand for steel had picked up recently in anticipation of near-term price increases. Food manufacturers reported steady demand and had increased hiring because of strong growth earlier in the year. Petrochemical orders remained extremely strong, and despite added capacity, inventories were low and prices continued to rise. Improved business overseas kept demand for oil and gas machinery steady at high levels, but respondents expressed concern over low domestic natural gas prices. Unseasonably warm weather lowered fuel oil costs, reducing refining margins to record lows. Several refiners said they plan to shut in capacity until margins improve.
Demand for business services grew at a slightly faster pace. Legal firms reported a pickup in demand associated with real estate transactions, mergers and acquisitions, and initial public offerings. Growing labor market tightness for experienced accountants increased upper level salaries in the accounting industry. Demand accelerated for temporary placement services. Both trucking and temporary service firms continued to report increasing wage pressures associated with strong demand and a shortage of qualified workers. Demand for business communications and advertising services slowed slightly from their previous fast pace.
Seasonally adjusted, retail sales growth slowed slightly after Thanksgiving and many retailers said Christmas sales did not meet expectations. Holiday sales were reported to be strongest for electronics, jewelry, toys and other hard goods. Sales of fragrances, cosmetics and most fashion apparel were less than expected. Heavy discounting and competition kept selling prices unchanged or below a year ago. Scores along the Mexican border said that sales dropped following the peso devaluation and are not expected to pick up for at least 3 to 4 months. Contacts in the auto industry reported that sales growth had slowed somewhat in December after an extremely strong November. Popular car models were said to be in short supply.
Contacts in the construction and real estate industry reported that higher mortgage rates continued to cause a decline in single-family construction. Commercial construction-especially for retail space- remained strong, but contacts voiced uncertainty about the year ahead. Demand for suburban office and retail space remained at high levels, and the apartment market was reported to be tight despite a number of recently completed projects.
Bankers reported that loan demand continued to increase at a strong pace, but said higher interest rates and competition had squeezed margins. Consumer lending remained very competitive, and strong demand for commercial loans had offset the decline in residential mortgage lending activity.
District energy producers reported that activity was unchanged. Strong global demand kept oil prices between 17 and 18 dollars per barrel, but warm winter weather pushed natural gas prices below last year's level. The district rig count was slightly below that of a year ago, but drilling activity in the Gulf of Mexico was still at good levels, according to contacts.
Most district agricultural producers reported higher production than expected. Livestock conditions were reported to be well above average across the district. Although prices for cotton, wheat, sweet corn and lettuce were higher, lower livestock, corn and soybean prices pushed the Texas All Farm Products Index down 6.2 percent from a year ago.