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Overall Eleventh District economic growth appears to have stalled in late July and August. While some sectors, such as high-tech manufacturing and business services, continued to show signs of recovery, other areas, such as construction and construction-related manufacturing, appeared to contract. While most respondents expect the economy to continue to slowly recover, many contacts expressed concern that the recovery is very fragile and that war with Iraq or another major terrorist event could lead to declines in activity. Manufacturing activity was flat or slightly down, and retail sales growth weakened slightly. Construction and real estate activity softened further. Energy activity was flat. There was also little change in financial conditions. Demand for business services continued to show signs of slowly improving, although the airline industry continues to suffer. Rain helped crop and pasture conditions, but drought remains a serious problem in some areas.
Prices and Labor Markets
Price reports were mixed. Reports of rising insurance costs continue to be widespread, and the costs of energy and oil-based products have increased. In most instances, contacts indicated that price competition was preventing these costs from being passed along to selling prices. Steel prices are up nearly 10 percent since June and are expected to continue to rise through the end of the year. Liner board prices are scheduled to increase roughly 4 percent from current levels, pushing up prices for some paper products.
Spot prices of West Texas Intermediate crude oil remained in a range of $26 to $28 per barrel, except for late August when they briefly moved over $30 per barrel. Fears of war with Iraq, falling Iraqi output, and tightening inventories have supported the price of crude oil, with the "war premium" variously estimated at $2 to $6 per barrel. Natural gas prices stayed under $3.00 per million Btu, except when oil prices moved over $30 per barrel in late August. Natural gas inventories have declined slightly but remain 11 percent above their five-year average and are expected to be at record high levels as the heating season begins. Gasoline prices were mostly unchanged. Petrochemical prices continued to rise for polyethylene, polypropylene and polyvinyl chloride, but producers do not expect the upward pressure on chemical prices to continue. Prices of new homes have not declined, but there are more concessions and giveaways. The rising inventory of homes in all price ranges is putting downward pressure on home prices according to some contacts.
Overall manufacturing activity was flat or down slightly in late July and August. Demand was down for most construction-related materials, such as concrete, lumber and brick. Demand slowed sharply for petrochemical products, led by a drop in demand for ethylene, a fundamental building block. The slowdown has occurred partly because of import competition but mostly because a long period of inventory restocking has ended. Still, the level of petrochemical demand remains quite high, according to contacts.
Sales were unchanged for glass, primary and fabricated metals and food products. Domestic demand for paper products was unchanged, but foreign demand was up, particularly from Europe. Another El Paso apparel plant is scheduled to close in September, because production is moving out of the United States.
Gasoline demand has been strong, and refiners on the Gulf Coast kept output unchanged, with capacity utilization at 93 to 95 percent. Strong imports helped keep inventories about 3 percent above last year's levels.
The high-tech industry continued to slowly improve. There has been a broad-based pickup in the demand for semiconductors, except to supply business computers. Inventories are in good shape and, while semiconductor prices remained soft, there are signs of firming. A manufacturer of cordless phones reported double-digit sales growth. However, there has been little change in the telecommunications industry, and layoffs continue to be reported.
Temporary service firms reported continued slow improvement, although activity remains substantially below the levels of a year ago. Demand for temporary workers is coming mostly from call centers, light industrial firms, and manufacturing. Demand was still weak to supply the telecommunications, IT and energy industries. Although accounting firms reported little change in activity, auditing activity was strong, boosted by newly imposed regulations. Legal firms reported an increase in demand for their services in late July and August, with strength in litigation, bankruptcy, labor, and administrative areas but continued weakness in transactions/acquisitions activity.
Demand for air travel remained at very low levels. Business travel has been particularly weak, and airlines are no longer able to charge a premium to these travelers, slashing revenues. The industry is concerned that business travel may remain weak for some time. Airlines are reorganizing to make more efficient use of capital and labor.
Dealers said auto sales have been good, as low interest rates and large rebate checks continued to bring buyers to showrooms. More generally, however, retail sales were below expectations in late July and August. Department stores reported poor sales, and discount stores said sales growth was at the lower end of their expectations. Some retailers recently lowered their outlook for sales growth. All contacts say that they are being cautious to keep their inventories in check.
Financial market volatility led to a sharp reduction in market-related activities, while commercial and industrial lending continued to be weak. Mortgage lending--first mortgages and refinancing--was still strong. Loan repayments also remained strong, and deposit growth was stronger than expected. While most contacts reported no change in credit conditions, some mentioned tighter scrutiny in loan committee and longer approval processes, although no significant changes to delinquencies or charge-offs.
Construction and Real Estate
Nonresidential markets are reported to be "difficult" and "terrible." Contacts are particularly concerned about new office space coming on line in downtown Houston, which they say could push up vacancy rates to 25 percent in 2003. Residential activity was mostly unchanged. Homes continued to sell if priced below $150,000, but sales of higher priced homes are slow. Home inventories are high, and some contacts expressed concerned about an excess supply of higher priced homes.
Energy conditions remained unchanged in July and August with about 335 working rigs in Texas and 850 rigs nationwide. Some producers say that they are still unable to aggressively drill because of weak balance sheets. Others are unwilling to risk the balance sheet because they believe high inventories are a risk to natural gas prices. Service firms say foreign drilling is down slightly but revenues are up because the projects are more complex.
The cotton crop is expected to be 15 percent above last year's harvest. In some areas, producers have been able to get a second cutting of hay, and a surplus of hay supplies has been reported for the first time in several years. Nonetheless, drought remains a problem in some areas, where supplemental feeding of livestock is high and herd liquidation is under way. In Southern New Mexico, some areas are out of water, and herd sizes have been reduced to 40 to 50 percent of normal.