Beige Book Report: Dallas
June 19, 1996
Eleventh District economic activity rose at a steady pace in late April and May, and contacts were optimistic about future business conditions. Orders for nearly all manufactured products increased. The most notable exception was orders for semiconductors which continued to plunge, driven by lower-than-expected computer sales. Construction activity remained strong, boosting demand for most construction-related products. The financial services industry held steady, and retail sales improved slightly. Energy activity strengthened despite lower oil prices than reported in the last survey. Drought continued to hamper the agricultural sector.
Prices and Wages
Respondents in several industries noted rising price pressures.
Prices were up for paper. brick, steel, cement, lumber and some
chemicals, and prices stabilized for corrugated box liner after
falling in previous months. In contrast, prices for semiconductors
continued to fall. Contacts in construction-related industries--
notably steel, brick, cement and glass--expected further price
increases later in the year due to strong demand and dwindling
inventories. High demand was reportedly causing rents to rise for
office and warehouse space. Livestock prices remained low, but food
processors said high grain prices continue to boost costs. In the
energy industry, oil prices fell to near $20 per barrel after news
of pending Iraqi sales of $1 billion per quarter, however, gasoline
and natural gas prices are expected to remain strong through the
summer. Reports of wage pressures were minimal, except for a few
respondents who were concerned about rising costs associated with a
higher minimum wage.
Manufacturing
Manufacturing orders rose steadily over the past six weeks. The most
notable exception was semiconductor orders which continued to
plunge. Contacts in the semiconductor industry said demand was down
for all types of semiconductors, not just DRAMs as noted in previous
reports, and inventories were rising. The weakness was attributed to
slower-than-expected demand for computers and computer-related
products. Contacts in the electronics industry were more pessimistic
in their outlooks and did not expect orders to bottom out for
another three to six months. On a more positive note, demand
increased for most construction-related products. Respondents said
an increase in brick orders had reduced inventories, and cement
shortages were reportedly worsening due to a pickup in commercial
and residential construction. Strong construction activity also
boosted demand for glass, steel and other metal products, and
inventories were on the small side. Contacts in the paper industry
said demand for several products, including corrugated box liners
and recycled paper, had bottomed out after falling for the past
three months. Apparel manufacturers noted somewhat stronger demand
due to an improving retail environment, and several had increased
hiring recently. The Gulf Coast petrochemical market continued to
improve, with good domestic demand, although profits have been
pressured by higher costs of oil and natural gas feedstocks. Oil
field machinery companies reported improving demand, driven by
strong international and offshore drilling.
Retail and Auto Sales
Retail sales improved in May, thanks in large part to an increase in
demand for women's apparel. Sales of lawn and garden materials were
also strong according to respondents. Most contacts reported no
inventory problems, but some retailers were letting their
inventories thin by not adjusting to the recent increase in demand.
Sales along the Texas-Mexico border continued to improve slowly.
Auto sales remained brisk in late April and May, and several
contacts said inventories were dwindling.
Financial services
Contacts in the financial services industry reported steady loan
demand over the past six weeks. The only exception was residential
refinancings which continued to fall. Contacts said demand for
consumer and commercial real estate loans remained at good levels.
District lenders expect loan demand to remain steady over the next
three to twelve months.
Construction and Real Estate
Construction and real estate activity continued to rise, according
to respondents. Homebuilders reported strong demand for new homes
despite higher mortgage rates, and sales of existing homes were also
brisk. Although apartment leasing remained strong, new completions
caused some developers to make concessions, such as a free month's
rent, in order to attract tenants. While downtown areas still have
excess office space, contacts said suburban markets are the tightest
they have been in over a decade and rents are rising as a result.
Energy
Despite slipping oil prices, energy industry activity improved over
the past six weeks, according to contacts. Demand for oil services
was driven by strong international, offshore and domestic drilling
activity. Natural gas drilling in the Gulf of Mexico has virtually
squeezed out oil drilling as producers seek to take advantage of
expected high natural gas prices through the summer months. The
global offshore market, including the Gulf of Mexico, is rig-
constrained with significant investment necessary to bring more
equipment on line.
Agriculture
Drought continues to impede agricultural production. Contacts rated
crop conditions as mostly good to fair, although Texas winter wheat
producers expect to harvest 27 percent less than both the 1995 crop
and 1994 crop. Range and pasture conditions were rated as fair to
very poor across the state, and livestock operators continue to
downsize their herds in response to weak prices and high feed costs.