January 17, 1996
The Eleventh District economy expanded at a slightly slower pace in late November and December, restrained in part by weak retail sales and sluggish orders in several manufacturing industries. Construction activity continued to increase, due to lower mortgage rates and strong demand for commercial space, and loan demand rose at a steady pace. Demand for business services accelerated, with strong demand from high-tech, real estate and lending companies. Energy markets improved as colder weather caused a surge in prices; however, the higher prices are not expected to be permanent. Farm income improved slightly as prices for crops and beef cattle rose.
Despite recent increases in energy and agricultural prices, there were few reports of price pressures among respondents. Retailers reported significant discounting, and prices were reportedly falling for paper products, petrochemicals, semiconductors and lumber. Wage pressures remained prevalent in the Eleventh District, although most contacts said they had not been passed on in the form of higher prices. Service industry contacts said labor shortages remained for electricians, engineers, software developers, accountants, temporary workers and long-haul truck drivers. In addition, many district manufacturers cited a lack of adequately skilled workers as a major concern.
Orders were somewhat weaker for some district manufacturers in the past six weeks. Contacts in the high-tech sectors said orders continued to rise at strong rates overall, but semiconductor manufacturers noted a slight deceleration from the torrid pace of growth noted in previous reports. Orders for construction-related products were flat to up, with steady growth in orders for brick but flat demand for residential lumber products. Lumber producers in the Eleventh District said lower prices for Canadian imports were reducing their market share. Orders for paper products continued to soften, and respondents expected selling prices to fall further as they try to reduce inventories. Apparel producers said demand remained flat due to soft retail conditions in recent months. Food industry contacts said demand was up slightly, with the exception of orders for low-fat products which continued to increase strongly. Commodity chemical markets continued to weaken, with production and consumption down in the fourth quarter. Refiners, however, pushed output to maximum levels in the last two months to take advantage of a recent surge in gasoline and fuel oil prices. Demand for oil field equipment and machinery remained flat at good levels.
Demand for business-related services, such as temporary, accounting and legal services, picked up in recent weeks. Respondents cited real estate, banking and high-tech industries as sources of increased demand. Hiring increased at legal and temporary firms but was only flat to slightly up at accounting firms because of shortages of entry-level and experienced CPAs. Temporary firms reported a tighter labor market for semi-skilled workers, with rising wages cutting into profit margins but not leading to higher fees. Nonetheless, respondents remained optimistic about near-term business conditions.
Contacts in the transportation services industry reported flat demand overall, although a seasonal rush in December boosted cargo volume at some firms. Heavy competition in the trucking industry and an unstable Mexican economy continued to be cited as sources of weakness.
Eleventh District retail sales remained weak in December, and heavy discounting hurt profits, according to most contacts. Department store and discount store contacts said sales picked up before the Christmas holiday, but were not enough to offset slow sales earlier in the month. Most retailers said the Texas/Mexico border region continued to be one of the poorest performing areas in the country. Outlooks for 1996 were guarded, and several respondents said they may scale back the number of new store openings this year. Auto sales rose in November and early December, and contacts expected 1995 year-end sales to be up moderately over 1994.
Eleventh District financial institutions reported steady growth in loan demand over the past six weeks. Demand for residential real estate loans was flat, and contacts said many consumers are waiting for mortgage rates to bottom out before refinancing. Commercial real estate loans increased significantly, and several contacts said consumer loans had risen. Contacts were positive in their outlook for 1996.
Construction and real estate contacts reported steady growth over the past six weeks. Demand remained strong for commercial space, and there were a few reports of speculative construction, mostly for industrial warehouse space. Demand for office space continued to rise and several respondents expected improvement in downtown areas in 1996 due to a lack of contiguous space in suburban areas. In addition, contacts expected hotel construction to pick up significantly in 1996. Lower mortgage rates kept demand for new and existing homes at good levels, but some contacts said buyer traffic had slowed recently, most likely a seasonal result. Respondents said apartment occupancies remained at very good levels; however, concerns of overbuilding had caused some contacts to curtail plans for new projects.
Eleventh District energy conditions improved in November and December as colder-than-normal November weather and a series of December winter storms combined to push energy prices up. After hovering between $17 and $18 per barrel for the previous five months, the price of crude oil moved to a range between $18 and $20 per barrel in late November and December. Fuel oil and natural gas prices were similarly pushed up by cold weather.
According to contacts, agricultural conditions improved over the past six weeks, and prices rose for most farm products. Respondents said livestock conditions were good. On a less positive note, dry weather and insect problems hurt the wheat crop. The Texas All Farm Products Price Index rose 3 percent from October to November, with a strong increase in beef cattle prices.