June 15, 2005
Federal Reserve Districts
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Eleventh District economic activity continued to expand. Manufacturing continued to be mostly strong but with some patches of softness. The service sector showed signs of picking up, while retail sales were up modestly. Construction and real estate activity remained unchanged at a high level. Financial service contacts said loan growth and credit quality remained good. Activity in the energy industry remained very strong, and contacts are very optimistic, but there is a lot of discussion about how long high prices can last. Agricultural conditions are favorable.
Crude oil prices have varied from less than $50 to more than $55 per barrel. Demand for gasoline was down compared to earlier this year and is now more similar to a year ago. Gasoline inventories are high; 4 percent above the 5-year average and at the highest level since May 1999. Natural gas prices fell from over $7.50 per million Btu to near $6.50. Natural gas inventories continued to grow and are now more than 20 percent above the 5-year average.
There were reports of rising fees for business services, such as accounting and legal. Prices for manufactured goods were mixed. Prices were up for construction-related materials, such as lumber, cement, brick, tile and glass. Primary metal manufacturers said that high energy and raw material costs have lead to some price increases, but persistently idle international capacity and a recent softening in steel and aluminum prices have reduced the threat of a price-rise in the near future. Paper producers say that heavy inventories have pushed down prices. Prices have fallen for all of the basic chemicals and most plastic intermediates.
Demand for food products continued to be strong. Apparel manufacturers said demand has been growing over the past month. In the last six weeks, one firm has hired 100 new workers overseas and about 30 domestically. Respondents in high-tech manufacturing said that growth in orders has increased slightly since the last survey. Much of the pickup occurred in the consumer sector. Sales to industrial customers continued to grow at a moderate pace. Telecommunications manufacturers reported a slight increase in demand.
Demand for corrugated boxes softened slightly. Contacts say there is still overcapacity in the industry and competitive pressures may cause some businesses to close. Demand had also softened for primary metals, although demand remained higher than a year ago.
Chemical producers reported an unexpected slow down in demand from Asia, particularly China, and inventory has shifted from shortage to oversupply. Contacts say the slowdown is not severe but was not expected. Production was reduced slightly but remained at high levels. Refining utilization rates on the Gulf Coast were hurt by a series of outages. Refined product imports were at the highest levels of the last five years and 9 percent higher than last year.
The transportation industry continued to report strong demand and serious concerns about high fuel costs. Railroads say the strongest demand is for shipping metallic ores, crushed stone, construction products and trailers. Contacts said rail shipping rates continued to rise, but the pace of increase seemed to be slowing. Trucking activity also remained strong and above year-ago levels. The airline industry continued to report strong demand in domestic markets but limited ability to raise prices, although carriers reported slightly higher fares in some markets. Carriers are moving capacity to international routes because fares are higher.
Construction and Real Estate
Demand for apartment space increased in Dallas and Houston but continued to be overshadowed by what many perceive as excess development. Rent concessions have picked up, especially in Houston. Contacts said Austin's multifamily housing market is not overbuilt, but they also expressed concerns about the possibility that new development under consideration could generate an oversupply.
Office markets continued to improve and the pace has picked up slightly, according to contacts. Dallas, Houston and Austin have witnessed positive absorption so far this year. Contacts say investment activity is at a record high.
Demand for oil field services has been very strong. According to contacts, oil field service companies are raising prices rapidly, and margins are improving. Backlogs are long, and companies are turning down work. Capacity is being expanded in critical areas. Day rates are skyrocketing for land and offshore rigs. Skilled workers are the critical constraint in any effort to expand, according to contacts, who say engineers, truck drivers and drilling crews are particularly in short supply.