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Constraints Limit Expanding H ouston Econom y The H ouston area econom y c o n tinues to grow with the industrial sector leading the advance, accord ing to respondents of the June 1989 H ouston Beige Book survey. The survey, conducted by the Houston Branch of the Federal Reserve Bank of Dallas, indicates that the econom y of the Houston area continues to expand despite various econom ic obstacles. This growth could expand faster were it no t for a num ber o f con straints on business activity. Beige book respondents continue to report that production of petrochemicals, refined products and paper remains at full capacity. This limits the growth of these industries until new plants and efficiencies allow for expanded production capacity. Another constraint relates to labor. The limited num ber of skilled labor needed to construct new petro chemical plants may lead to short ages and delays. Survey respon dents anticipate a shortage of welders, pipefitters and machinists this fall as dem and rises. The lack of available financing is also constraining growth. len d in g at local banks has been sparse, ac cording to respondents. This tight credit market is particularly trouble som e to the energy and small business sectors of th e economy. Although these constraints are limiting econom ic growth in the H ouston area, inflation is not a major problem due to moderate price increases. Respondents report that inflationary pressures are modest, although wholesale prices are heating up. Retailers indicate the rise in their prices is being restrained by a move to "lower everyday prices," Manufacturers point to slower increases in prices as a guard against inflation. Wage inflation also remains in check. This can be explained som ew hat by recently negotiated labor contracts in the paper industry which grant annual increases in the 2 to 3 percent range in many industries and 4 percent in the petrochemical industry. The following is a brief overview o f the June 1989 Houston Beige Book survey results expressing what Houston area business leaders believe lies ahead. ❖ Retail Sales The return o f warm w eather to the Houston area spurred retail sales in April and May. Total receipts were u p 8 to 10 percent above sales for the same period last year. Major retailers and specialty stores reported the largest gains, but major chain stores anticipate advances through a m ove to “everyday low prices” that is hoped to w oo the customer attracted to “discount” prices. All sectors o f the retail market seem to be optimistic about the future in Houston. Retailers dem on strated their bullish attitude through a solid increase of new orders for fall and Christmas. This commit m ent to the future dem onstrates a firm belief that increased sales will continue. Retail prices are increasing m od estly. Wholesale prices are rising a minimum of 4 to 5 percent, and import prices are leading the price increase due to accelerated wage rates in the Far East. 1989 were u p 9 percent from the same period last year. According to the survey, dealers anticipate this increase will be sustained though this year averaging a 8 to 9 percent increase over 1988. This optimism is held in spite of the fact that incentive programs featuring low interest rate finance plans have been losing their punch. This attitude is supported by the fact that dealer inventories remain within m anageable limits. Houston Branch A utom otive Sales New car sales increased in April. Sales for the first four months of Federal Reserve Bank o f Dallas Continued o n page two July 1989 This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) Strong Fall Inventory Orders Show Retailers Bullish O n H ouston Econom y Oil Field E qu ipm en t Oil field equipm ent manufacturers are caught with higher inventories than desired due to underinvestm ent by the major oil com panies and lower export sales, according to survey respondents. The consensus is that this trend is not expected to reverse this year, and no growth is anticipated for the industry. H ow ever, a major oil field equipm ent manufacturer anticipates a gradual increase in drilling activity through the third quarter which w ould then accelerate in the fourth quarter. Price trends in the industry are a mixed bag. Higher crude prices contrast sharply with w eak natural gas prices, although prices for gas are expected to strengthen in the second half of the year. Input prices in the drilling industry remain soft, and there is no upw ard pressure on wages. Several factors that affect the oil field equipm ent industry have created som e concerns for some respondents. First, bank lending for drilling projects seems to have dried up, according to respondents, although som e recovery in institu tional financing is evident. Second, a strong recovery in drilling w ould quickly create a num ber o f shortages if industry members do not accurately antici pate the drilling increase. Current estimates suggest serious labor shortages w ould develop w hen the num ber of working rigs in the nation surpass 1,200. Drilling pipe w ould also be in short supply for a short period of time. Paper Industry Total production in the paper industry continues at full capacity. However, respondents note some softening in the high level of dem and as reflected in a reduction in the backlog of new orders. Output in 1989 is anticipated to match the level of production in 1988, according to respondents. To m eet these challenges, the industry is investing in new plant and equipm ent to increase both produc tivity and manufacturing capacity. Inventory levels are term ed “about right” by respondents in the paper industry, and the trend in paper prices is flat. As a result, prices of some products are being rebated. Input prices are flat or minimally increasing, particularly in pulp. Wage increases are in the m odest 2 to 3 percent range. Something of concern to members of the paper industry is the rise in the value of the dollar. A stronger dollar threatens exports, which has been the fastest growing sector of the paper market. Page Two Petrochemical Industry Capacity constraints are holding dow n petrochemical production to slightly above 1988 levels. As a result, spending for new plants is up sharply along the Texas Gulf Coast, totaling about $5.5 billion according to one estimate. Selling prices are leveling off, and profit margins are moderate. At the same time, input prices of feed stocks, metals and other raw materi als are softening. Wage gains are on the order of 4 percent annually. Although optimistic about the future of the industry, respondents voiced some concerns. O ne con tinuing concern in the industry is the potential shortage of building tradesm en as the num ber of new plants under construction increases next fall. Respondents fear the pool of labor available will continue to be low and that of highly skilled labor even lower. This concern is particu larly worrisome in the skilled labor categories of welders and pipefitters that are crucial to building petro chemical complexes. R efining Industry Gasoline sales and prices are near seasonal peaks, and refiners are operating at full capacity, according to respondents. Yet, despite the high level of output, there is a minimal am ount of new investment to increase capacity in the industry. ❖
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