March 5, 2008
Federal Reserve Districts
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The Eleventh District economy continued to soften from January to late-February. Reports were uneven but suggested moderate economic growth. Contacts expressed a great deal of uncertainty about the outlook for growth, and some said they are preparing for the possibility of an economic downturn.
Energy activity remained high, but the level of activity has flattened out. There was a pickup in service sector activity, but manufacturing continued to soften, and retail sales were weak. Construction activity slowed further. Financial service firms said lending had softened. Dry weather hampered agricultural conditions.
Strong global demand pushed up oil and natural gas prices. Gasoline prices began a sharp seasonal rise as the driving season approaches. Higher fuel costs have pushed up shipping fees, and one contact said a new fuel surcharge has been added for overseas cargo.
Agricultural prices have also risen. Cotton prices are up, while wheat, corn and sorghum are near record levels. Food manufacturers said concerns about high electricity costs are dwarfed by escalating prices for flour, shortening, corn, soybean meal and dairy products. Contacts say they see no sign of upward price pressures abating.
Building costs have risen for nonresidential construction. Metal prices are up, including for aluminum, copper and steel. Prices have fallen for lumber and other products used in residential construction.
Upward wage pressures have eased in some industries but continue to be reported in others. Temporary service firms said pay rates have been pushed up because of shortages of white collar and executive talent. Shipping firms said the shortage of talent has pushed wages up by 5 percent.
Demand remained weak for materials to supply residential construction, such as lumber, metals, brick and glass. Contacts at these factories were pessimistic, and said business is tough and competitive. Sales of products for nonresidential construction are still strong but no longer offsetting slowing residential sales, and there is caution that activity will slow.
Refiners cut production in the face of weak margins and high gasoline inventories. Utilization rates dropped sharply from 89 to 85 percent--twice the normal seasonal drop. Domestic demand for polyvinyl chloride remained weak, particularly for residential construction, although sales remained fairly strong for commercial and public construction. Polypropylene producers have reduced production to maintain prices in the face of weak demand. Base chemicals and plastics continue to pull back from the massive exports that occurred last fall.
Shipping activity was unchanged on balance. Declines in the value of the dollar have stimulated exports, according to contacts, but the increase has not been enough to offset the decline in imports. Railroad activity remained strong, stimulated by shipments of chemicals and products to support nonresidential construction. Rail transport continued to decline for products to supply residential construction, and there was a slight decline in volumes for petroleum products. Airlines reported an increase in traffic and say bookings are holding up.
Construction and Real Estate
Commercial construction remained active, but demand for office and retail space had decelerated. The pace of investment in new nonresidential projects has slowed.
Lending has softened, especially for automobile, mortgage and commercial real estate loans. Credit standards for commercial loans have tightened. Credit quality is sound, say financial service contacts.