Thursday, April 16, 2009

TheFedera ReserveBoard_District_eleven_1stQtr2009


The Federal Reserve
Board


April 15, 2009


Federal Reserve
Districts





Eleventh
District--Dallas



Economic conditions in
the Eleventh District remained weak from mid-February to the end of
March. Contacts across a broad range of industries including
manufacturing, retail, residential construction and financial
activities reported that they were seeing signs of stabilizing at low
levels. Other industries, such as oil and gas extraction, employment
services and intermodal transportation noted sharp declines.
Financial services continued to report low lending activity due to
weak demand and tight credit standards. Drought conditions and low
margins continue to put a financial strain on District farmers and
ranchers.





Prices


Most contacts reported
continued downward price pressures. Retail contacts said that prices
of some items like apparel were flat but many food and some plastic
items were declining in price. Service industries such as accounting
and legal services said they were having difficulty resisting
customer demands for lower prices and several noted some recent
discounting. Transportation service contacts noted falling prices,
particularly airlines. Many manufacturing contacts reported price
declines, with some sharp declines in industries tied to
construction.





Prices for light sweet
crude were near $40 per barrel in late February, but rose to over $50
per barrel in late March. Contacts said that much of the increase
seemed to be driven by news of additional fiscal and monetary
stimulus and data indicating greater stability in the economy.
Natural gas prices fell under $4 per thousand cubic feet for the
first time since 2002, but moved back over $4 as crude prices rose
and economic news improved. Respondents felt that fundamentals
remained negative, however, with winter ending and weak industrial
demand, steady production, ample inventories and a forecast of cool
summer weather.





Labor Market


Labor markets remained
weak, although a growing number of respondents are holding employment
levels flat rather than cutting further. Many respondents noted that
they had already cut and that they were trying to hold on to key
personnel. The main exceptions were energy extraction, real estate,
construction and manufacturing which have all experienced further
layoffs. Many companies reported hiring freezes and very little, if
any, wage increases.





Manufacturing


Most manufacturing
contacts reported that after several months of sharp declines, demand
is starting to flatten at low levels. Most reported that they have
kept inventories tight.





Most
construction-related manufacturers reported that after another sharp
decline in February, orders flattened out in March. An exception was
the fabricated metals industry which reported a sharp decline in
orders over the past 30 days. Many construction-related contacts
reported very low levels of capacity utilization with some firms
reporting levels below 50 percent. Several reported temporary plant
shutdowns and continued layoffs. Most contacts expected the current
weakness to persist throughout 2009 with residential starts showing
no improvement and non-residential construction continuing to weaken.





High-tech manufacturers
reported that after steep declines in February, demand has started to
"bounce across the bottom." Semiconductor contacts reported
that conditions are particularly weak in memory chips which will
likely experience an L-shaped recovery with an extended bottom while
logic chips should see a U-shaped recovery. Demand has been
particularly weak for producers of equipment used in chip production
with sales down by two-thirds to three-fourths from two years ago.
High-tech manufacturers report that they have been able to keep
inventories low so that when demand begins to increase it will
translate quickly into increased production. One respondent noted
that the current downturn in high-tech is much worse than the
high-tech recession in 2001.








Paper producers
reported that demand has flattened since the last survey. Some
contacts reported that employment has stabilized after significant
cutbacks last year. Inventories were mixed with some contacts
reporting desired lean levels and some reporting excess inventories.
Most contacts expect demand to improve near year-end.





Petrochemical producers
generally indicated that the free fall of late last year is over and
there was growing stability and even a small turnaround in operating
rates. Contacts reported that ethylene and a number of other chemical
and plastic products have clearly bottomed out after massive industry
destocking last fall. Contacts said that no one is buying inputs
without an order in hand, leaving demand still erratic and
unpredictable. Operating rates are slowly moving up however, from 70
to 75 percent.





Refinery capacity
utilization remained weak and near 82 percent, but part of the
weakness was due to normal spring turnaround and maintenance, and the
switch from heating oil to gasoline production. The demand for
distillates (diesel and heating oil) fell seasonally, and prices
along with it. Refinery margins improved from the very low levels
early in the year, but are still depressed.





Retail Sales


Retail contacts
reported that sales have flattened out since the last survey. Most
retailers that focus on discretionary items report that
year-over-year sales are down from about five to twelve percent.
Luxury items continue to suffer the most while food and necessities
are doing better. Contacts also note a continued switch to
lower-priced private label brands. Most retail store contacts expect
demand to remain near current levels through much of this year.





Auto dealers reported
generally flat sales over the past six weeks, with year-over-year
demand down about 40 percent. Sales continued to be weak for both
domestic and imported brands. Respondents reported that while credit
remains tight, the major factor suppressing demand was low consumer
confidence due to job losses, loss of household wealth, and
uncertainty about the economic outlook. Most expect continued
weakness through the end of the year.





Services


Staffing firms reported
continued weak demand. Many of their clients are laying off workers
and are thus not renewing contracts on current personnel. New orders
are down sharply for both direct placements and contract work. Demand
is reported to be very weak across industries with the exception of a
slight uptick in orders for sales professionals and some increase in
finance personnel due to the recent rise in refinance activity, loss
mitigation and collections work. The outlook remains weak and
uncertain.








Demand for legal
services continued to soften. Contacts reported that demand continued
to be concentrated in litigation and bankruptcy, while there is
little corporate, real estate, or transactional demand. While demand
for bankruptcy-related services has increased slightly since last
Beige Book, it has not yet increased as much as contacts expected at
this point in the recession. According to contacts, if litigation and
bankruptcy don't pick up as they normally do, "it's going to be
ugly." Legal demand that had been coming from abroad is still
very tight or basically cut off. Demand for accounting services is
steady and continues to be concentrated in tax and audit. Both legal
and accounting firms expect growth to be essentially flat this year
and noted that receivables are harder to collect.





Airline demand has
weakened slightly over the past six weeks with demand weakening the
most for business travelers and international flights. Contacts said
that they are dropping fares in response to lower demand and lower
fuel prices. Contacts in container trade and intermodal
transportation report that cargo volumes have been down over the last
30 days. Declines in both domestic and international activity have
contributed to the fall off. One exception is small parcels. On a
seasonally adjusted basis, small parcel growth has been improving
since last October. The pick-up has been led by express air volumes,
although ground volumes have also improved somewhat since January.
Contacts in rail transportation said that there has been some pickup
in demand in the past six weeks. Significant volume increases were
observed in motor vehicle shipments, although the pickup followed a
sharp decrease in the beginning of the year when many auto plants
were temporarily shut down. Pronounced declines were seen in
shipments of lumber and wood and in non-metallic minerals.





Construction and Real
Estate


Eleventh District
housing conditions remain weak, but contacts are more optimistic
about the spring selling season than they were at the end of 2008.
Home sales remain well below year-ago levels, but respondents noted
that homebuyer traffic was better than expected. There were scattered
reports of downward price pressures in some areas with rising
foreclosures but overall, contacts said home prices in most Texas
metros are holding up much better than in other areas of the country.
Single-family housing starts continued to decline as builders endure
a "painful decrease in home production." Several contacts
noted that smaller builders continue to shut their doors as financing
becomes more of a problem in the face of slow sales and little cash
flow. A very high inventory of developed lots is causing financial
problems for lot developers and banks as lots are re-priced,
according to respondents. Outlooks remain grim for 2009, but most
contacts expect conditions to begin to improve in 2010.





Apartment leasing
activity steadied in the first quarter after a dismal fourth quarter.
Despite the better than expected demand, contacts say occupancy rates
and rents will soften in coming months due to the high volume of
construction activity in the pipeline. Rent cuts are already
prevalent in the Austin area where demand is weak and new projects
continue to be completed. Office and industrial leasing activity
continues to decline, and rental concessions are rising.





Contacts say office
sublease space is growing modestly as companies downsize. Commercial
real estate investment activity is being hampered by worsening credit
availability "that is very close to a complete absence of
lenders." Contacts remain very uncertain in their outlooks, but
are hopeful recent government initiatives will lead to some
improvement in coming months.





Financial Services


A broad range of
financial services contacts in the District continue to report slower
demand. Real estate deals continue to be scarce with only the very
highest quality deals getting done at lower leverage and a smaller
size. Respondents report that over ninety percent of the few deals
getting done are multifamily, and these deals are only about 10
percent of the volume of a year ago. Due to new NCUA assessments,
credit unions have had to rein in their competitive pricing and feel
somewhat more restrained.





Contacts reported that
commercial real estate loans are basically nonexistent and maturing
loans are being renewed at lower leverage/size, while some are not
eligible to be renewed. Contacts have seen a continued slowdown in
consumer loan demand with credit card purchase volume falling.





Contacts have continued
to see some deterioration in credit quality and report maintaining
tight credit standards. Contacts have also continued to price loans
off LIBOR or set floors on the prime rate. Deposits are relatively
stable, but difficult to grow due to short-term interest rates
essentially at zero. Outlooks remain weak although most contacts were
slightly more optimistic compared to the last survey.





Energy


The demand for oil
services and drilling equipment continues to shrink with the rig
count. Over the past six weeks the number of U.S. working rigs is
down by 300 or 22 percent. Texas, New Mexico and Louisiana all had
significant losses, especially Texas which lost 168 rigs - over half
the national total. Respondents indicated that a number of natural
gas wells drilled in nonconventional shale are cased and will be
re-entered when natural gas prices improve, and will give a quick and
large boost to supplies.





Agriculture


Drought conditions
persisted across much of the District despite recent rains. The lack
of sufficient moisture has been of particular concern to cattle
producers, and many ranchers have been forced to cull their herds
because of poor pasture conditions, low water supplies and high feed
costs. Farmers are holding back on planting crops especially in the
dryland areas, and plantings of cotton and sorghum were slightly
behind normal. Milk prices have fallen well below production costs
leading to financial losses and culling of dairy cow herds. On the
beef cattle side, the feedlot industry continues to struggle due to
high feed costs and low cattle prices, a result of the ongoing
drought and weak demand.



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