Beige Book Report: Dallas
May 8, 1996
Eleventh District economic activity picked up in March and April. More contacts reported price increases and lower inventories than in January and February, but there were fewer reports of wage pressures or labor shortages. Manufacturing orders rebounded, although several producers said activity was below the level of a year ago, and demand for semiconductors and telecommunications equipment remained weak. Business service firms reported a seasonal increase in demand, and retail sales improved. The financial services industry reported mixed lending activity over the past 6 weeks. Construction and real estate activity remained brisk, and energy activity strengthened. Drought, low cattle prices and high costs continued to stress the agricultural community.
Prices were up for crude oil, crops, petrochemicals, plastic packaging, steel, lumber and some primary metals, and semiconductor prices had stopped falling. Apparel, paper, computer and livestock prices were lower. Producers of cement, brick, crude oil and petrochemicals said that their inventories were below desired levels, while inventories were up for newsprint, lumber, and semiconductors, particularly memory chips. Semiconductor inventories were much too large-roughly 50 percent higher than 6 months ago-but are "not even close to inventory levels of the big semiconductor cycles in the 1970s and 1980s." Telecommunications and computer manufacturers said inventories were slightly larger than desired, and heavy competition was keeping downward pressure on personal computer prices. Shortages of cement led producers to ration customers. Brick plants in Texas are reported at near capacity, but strong demand had not yet led to higher prices. Low inventories pushed up crude oil prices to between $23 to $25 per barrel for most of April, although oil futures suggest prices will decline. Prices were up for plastic packaging materials, but prices continued to fall between 5-8 percent for all types of paper products, and producers said their customers had excess inventory of newsprint. In March, lower prices for livestock outweighed higher prices for most crops, pushing down the Texas All Farm Products Index of Prices Received to 1.0 percent below last month's level. Food processors said high grain prices raised costs and caused some producers to reduce production and boost selling prices.
Manufacturing orders rebounded, although several producers said activity was below the level a year ago and demand for semiconductors and telecommunications equipment remained weak. Demand was up for apparel, lumber, brick, cement, primary and fabricated metals. Paper producers reported a notable rebound in demand for corrugated boxes, although demand for newsprint dropped. Demand for petrochemicals began to increase from both domestic and foreign customers, after what producers report was a successful soft landing for their industry, with continued profitability and no inventory build-up. Oil field machinery firms continued to report strengthening demand and good profits. Cold weather and snow in New England stimulated demand for heating oil at District refineries, causing a delay in the switch over to gasoline production. Gasoline inventories were 5 percent under last year's levels, with the driving season starting at the end of May. Electronics firms reported a slight increase in demand for computers, but demand for memory computer chips and microprocessors continued to be below expectations. Overall, semiconductor demand in real terms was growing at about a 10 percent annual rate, compared to 30 percent five months ago. Demand for telecommunications equipment also weakened, mainly due to softer sales in Europe. Electronics contacts were very cautious about the outlook for sales, expecting only slight increases in the volume of sales into 1997.
Business service firms reported a seasonal increase in demand. Several firms were hiring and there were fewer reports of difficulty finding qualified workers. Demand was up for passenger and cargo transportation, temporary, accounting and legal services. Firms supplying temporary workers said that demand for workers to staff telephone call centers was particularly strong.
Retail sales continued to improve, although contacts said competition remains very stiff. Retailers must use heavy promotion to attract the "price-driven consumer" because there are "too many stores in Texas." Auto sales picked up, particularly for used cars.
The financial services industry reported mixed lending activity over the last 6 weeks. Higher long-term interest rates led to a slight decrease in residential real estate lending, and a sharp drop in refinancings. Contacts reported some increases in consumer and commercial real estate loans. District lenders were cautiously optimistic in their outlook for loan demand in the next 3 to 12 months.
Construction and real estate activity remained brisk. Homebuilders reported a pickup in new and existing home sales, although they are concerned that rising mortgage rates could damp demand later in the year. Apartment leasing remained strong despite a large number of new units that were completed in the first quarter. Apartment builders continued to cut back on starts in anticipation of rising vacancies and slower growth in rents in the coming months. Office and warehouse leasing remained very strong and rents continued to rise. Contacts said construction of warehouse and office space increased, although labor shortages were causing some delays.
Energy activity continued to strengthen. Demand for oil services was boosted by increases in international and U.S. drilling activity. Seasonally-adjusted, the U.S. rig count was up by over 50 rigs in April-to over 825 rigs-with two-thirds of the increase in Eleventh District states. Natural gas drilling is pulling the rig count upward, and the Gulf of Mexico is well positioned to sell gas to the East Coast. International drilling continues to increase, particularly in Latin America and Africa.
Drought, low cattle prices and high costs continued to stress the agricultural community. Bankers reported an increase in the number of farmers and ranchers starting the year with large debt carryover, and expressed concern about the "serious problems" facing the agricultural community and the increased likelihood that some farmers and ranchers will quit or be forced out of business.