May 10, 1995
Eleventh District economic activity continued to expand at the slower pace established in January and February. Retail sales remained sluggish in March and April and sales along the border continued to be very weak. Manufacturing orders were up although more contacts reported reduced sales to Mexican customers. Demand for business services remained strong, however, and construction activity was reported to be at good levels because of increased demand for nonresidential space. Bankers said loan demand grew steadily. Rising energy prices boosted respondents' outlooks, but domestic drilling activity remained below last year's levels. Agricultural producers said that dry weather hampered production slightly.
Manufacturing and service contacts said that price and wage pressures remained in some industries, much the same as reported in the last Beige Book. Rising prices for packaging and shipping materials continued to boost costs for most manufacturers. Apparel producers said that higher prices for cotton and some chemicals were adding to their costs, but that they had not increased selling prices. Capacity constraints in the semiconductor industry pushed up costs for some electronics manufacturers. In the services industry, fees and wages continued to rise at temporary help firms. Rising competition had reduced fees at trucking firms, but a shortage of drivers continued to push up wages. Retailers said their selling prices were lower than expected. Energy prices rose, but natural gas prices were still at very low levels. Weakening livestock prices led to a decline in agricultural prices.
Eleventh District manufacturing orders rose in March and early April. Demand for electronics and petrochemicals remained very strong, but orders for paper softened slightly. Although paper contacts noted a slowdown in demand, they said it was a welcome relief compared to the tight condition of the past few months. A notable exception was corrugated box distributors who said that demand had increased, likely a result of businesses trying to hedge another price increase. The demand for most construction-related products rose, although orders from residential builders were well below last year's levels. Brick producers said demand increased over the last six weeks, but sales were off 20 percent from year-ago levels. Glass respondents said orders remained strong despite rising competition from Mexican producers. Primary and fabricated metals producers said orders continued to rise due to strength in the nonresidential construction sector. Lumber producers said that demand had leveled off because of fewer housing starts. Orders remained strong for electronic equipment, and competition continued to drive down prices. Apparel sales rose, but some respondents noted increasing cautiousness in orders from retailers. Orders for food products increased, and contacts in the frozen food industry said the California floods stimulated orders for frozen produce. Domestic and international orders for chemicals were very strong, and contacts reported healthy profits. After an extremely weak first quarter, refiners said margins improved slightly in April as gasoline prices rose more quickly than crude prices.
Demand for business services continued to rise at a strong pace. Temporary employment firms reported rising demand, and labor market tightness continued to drive up wages and fees for skilled workers. Accounting and legal respondents reported growth in business activity such as mergers and acquisitions. The outlook for business services firms was positive, with no slowdown anticipated in coming months. Hotel contacts said business was up over last year, but that Easter season was disappointing because fewer Mexican families vacationed in Texas. Respondents in the transportation services industry said that demand was up slightly since the last Beige Book, but trucking contacts said that increased competition had reduced business and fees.
Retail sales remained sluggish in March and April, and most contacts said that sales were slower than expected. Larger than desired inventories at some stores was leading to a brief period of discounting. In general, selling prices were reported to be the same or slightly higher than last year. Most retailers said that selling prices have not increased as much as they expected this year, and indicated that they are resisting higher prices from manufacturers. Sales along the Mexican border continued to be very weak. Auto sales improved in March and April but were below last year's levels.
District bankers reported steady loan demand. There was strong demand for construction loans despite fewer residential mortgage loans. Bankers reported increased liquidity because higher interest rates had reduced the relative attractiveness of non-bank investments.
Construction activity remained strong as nonresidential construction increased. Industrial construction picked up, especially near the Texas/Mexico border where manufacturing expansions boosted the demand for warehouse space. Apartment construction continued to increase at a rapid pace, but some contacts were concerned that the market would not be able to absorb all the new space. New home sales were weak, but contacts said that buyer traffic had picked up with the decline in mortgage rates. Most were expecting some improvement in sales in the coming months.
Energy respondents reported that drilling activity in the Gulf of Mexico seemed to have bottomed out in recent weeks, after declining about 10 percent during the first quarter. Although domestic drilling activity remained weak, contacts working in international markets said activity there had increased, more than offsetting the domestic losses. Crude oil prices increased from about $18 in early March to over $20 in April, raising optimism among contacts, even though the futures market suggests that $20 oil prices will not be maintained. Natural gas prices remained weak.
Eleventh District agricultural producers said dry conditions in west Texas were hampering production slightly. Strong demand for cotton worldwide had increased prices and prospective cotton acreage. Despite higher crop prices, lower prices for livestock caused the Texas All Farm Products Index to fall 2.9 percent below the March 1994 level.