March 13, 1996
Eleventh District economic activity continued to expand at a moderate pace in January and February, although weaker demand led to falling prices or inventory build up in several industries. Most contacts do not expect to change employment growth, and several major expansion plans remain in place. Manufacturing orders continued to weaken, but production remained at moderate levels. Demand for business services expanded. Retail sales were sluggish in January but picked up in February. Lending activity was unchanged, with the exception of an increase in residential real estate. Construction activity continued to expand, but some apartment and retail projects were scaled back because of concerns about overbuilding. Energy activity was at a high level. Agricultural conditions worsened.
Contacts reported falling prices for several products, although energy prices were higher and there was continued upward pressure on wages for skilled workers in some industries. In February, paper and box prices fell about 8 percent from the previous month, and contacts expect prices to fall another 5 to 10 percent over the next 3 to 6 months. Semiconductor prices had dropped "precipitously" since the last beige book, and stiff competition forced computer manufacturers to pass lower input costs to their customers. Petrochemical prices were pushed to low levels as slower demand, particularly for olefins, led producers to dump products on the spot market. Contacts expect any significant economic upturn to push chemical prices back up, however. Lower livestock prices outweighed a slight increase in crop prices, leading to a 1.0 percent drop in the January Texas All Farm Products Price Index from the previous month. Retailers reported little change in selling prices. Input costs were higher for apparel products, but selling prices were unchanged. Weather extremes, and changing expectations about Iraqi oil re-entering the market, kept crude oil and heating fuel prices swinging. Prices for most energy products, particularly natural gas and fuel oil, were high and volatile during the past two months.
Manufacturing orders continued to weaken, but production remained at moderate levels. Demand had slowed for paper, boxes, apparel, primary metals, petrochemicals and semiconductors. Inventories were up for paper, apparel, primary metals and some types of semiconductors. Producers reported a slight increase in demand for computers and specialized semiconductors, but demand for memory computer chips and microprocessors dropped off significantly in the last 6 weeks. Overall, semiconductor sales were weaker than expected, and contacts expect demand to increase at a slower pace than in 1995. Petrochemical markets continued to soften. Chemical producers said there had been no significant inventory build up and sales were still profitable, which is unusual when demand is weak. Cold weather boosted demand for refined products, although rising crude prices kept profits mediocre. Low inventories of crude forced refiners to purchase crude on the spot market to raise output and take advantage of high product prices. Producers reported a slight pickup in demand for oil field machinery and lumber, and demand remained steady and strong for cement and fabricated metals.
Demand for business services continued to expand at a good pace. Accounting firms said demand was strong. Activity at temporary firms picked up in February after a seasonal slow down in January. Transportation firms reported steady cargo volume and a slight increase in passenger traffic.
Retail sales were sluggish in January but picked up in February. Retailers were cautious about drawing conclusions from stronger sales in February, what a contact referred to as "one short month." District sales were reported to be about even with the rest of the country after several months of reports that sales were slower than the nation. The change may have been a result of an improvement in sales comparisons along the Texas-Mexico border, rather than any relative change in consumer spending. Dealers reported that auto sales were sluggish in January and February, leaving them with larger than desired inventories.
The financial services industry reported no change in lending activity, with the exception of an increase in residential real estate. Contacts said that the increase was spurred by lower interest rates and was mostly due to refinancings. Residential loan demand continued to decline in Laredo, however, where economic activity has been sluggish since the peso devaluation. District lenders are cautiously optimistic about the outlook for loan demand over the next 3 to 12 months and expect all types of lending to increase. Contacts reported that there is a lot of discussion about further mergers and acquisitions among financial services companies.
Construction activity expanded, but some apartment and retail projects were scaled back because of concerns about overbuilding. Lower mortgage rates boosted sales of new and existing homes. Demand for commercial space remained high, and industrial demand was very strong. While the construction of office space is sparse, some contacts said rising office occupancies in the suburbs may spur new construction in 1996.
Energy activity remained at a high level since the last beige book. Demand for oil services and equipment continued to strengthen, thanks to offshore drilling in the Gulf of Mexico and around the world. Oil services contacts reported that strong demand had boosted profits well above expectations. Higher capital budgets for exploration from integrated companies are expected to lead to another good year in 1996. The domestic U.S. and Texas rig count continued to be low, however, operating at levels comparable to this time last year.
Agricultural conditions worsened in January and February. Continued drought led to more than 350 fires which destroyed more than 20,000 acres of pasture land. Hay shortages still were reported in many areas. Supplemental feeding of livestock continued and rising feed prices were cutting into profits. As planting gets underway, some farmers expressed concern about having adequate water to produce a good quality yield.