October 15, 2008
Federal Reserve Districts
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The Eleventh District economy slowed markedly in late August and September. Many businesses were affected by temporary production disruptions caused by hurricanes Gustav and Ike. In addition, softer demand and increased uncertainty caused some firms to reduce investment and payrolls. Moreover, a number of contacts reported recent credit market developments had led them to re-evaluate future plans amid slower growth nationally and internationally. Outlooks were more pessimistic than in the last survey, with respondents citing many "unknowns" on the horizon.
Crude oil prices fell from $115 per barrel in mid-August to below $100 by the first week of October. Natural gas prices also edged down, in part due to high inventory levels. Despite a brief spike during recent storms, the national average price of gasoline fell about 11 cents per gallon, and diesel about 24 cents, during the survey period. Contacts expect soft demand for petrochemicals to lead to weaker prices for ethylene and polyethylene in coming weeks.
Pockets of tightness remain, however. Labor shortages are prevalent in the energy sector, and firms continue to steal workers from other industries. Some manufacturing respondents still reported difficulty finding workers with highly specialized skills. Driver shortages persist, although lower diesel prices were enticing some drivers and operators to return to work. Staffing firms noted difficulty filling upper-level positions.
Producers of residential construction products said new orders and shipments continued to fall due to worrisome conditions in housing markets. One company had laid off salaried workers for the first time in 20 years. Some respondents expressed concern over builders' ability to pay existing contracts with suppliers or renew lines of credit. Metals producers said the falloff in demand had worsened recently, in part due to slower growth worldwide.
High-tech manufacturing respondents reported mixed conditions, although overall production and new orders have declined slightly since the last survey. One contact noted the market for memory chips weakened further due to the recent slowdown in the global economy. The current financial situation is reflected in a more cautious business environment, with the possibility of fewer orders from retailers for the upcoming holiday season.
Food product manufacturers said sales were solid, although there were reports of temporary production cuts and export delays due to the storms. Specialized transportation equipment firms said activity remained stable despite demand disruptions from clients tied to the Houston Port. Orders for paper products were mixed.
Refinery production in Texas and Louisiana was severely disrupted by the back-to-back storms, as plants were forced to reduce output or shut down. Contacts say damage was light, and all refineries but one are operating or restarting production. Still, the storms left inventories at record lows, leading to spot gasoline shortages in the southeast and on the east coast.
Auto sales continued to fall, leading to high inventories, even for used cars. Contacts attributed the weakness to heightened consumer uncertainty related to the current financial environment. While down significantly from last year, truck and SUV sales picked up slightly over the past six weeks, as low prices enticed some buyers. Tighter credit conditions are making it harder for the marginal customer to get a loan, but contacts said the primary problem is the lack of customers.
Several respondents in the transportation services sector noted considerable, although temporary, loss of business as a result of hurricane Ike. Intermodal transportation contacts saw a rise in cargo volume last week as activity caught back up after the closing of the Port of Houston. Overall, respondents were thankful the port was closed for just one week, and suffered minimal damage. Railroad cargo volumes continued to decline. The storms reduced cargo volumes of chemicals and petroleum products, while construction materials and motor vehicles volumes fell dramatically--which contacts attributed to weaker consumer demand. While business activity is expected to remain fairly stable through year-end, outlooks reflected increased uncertainty about the economic impact of the current credit market situation.
Eleventh District-based airlines said demand was holding up, despite losses due to Ike-related cancellations. Recent capacity cuts and increased fares helped bolster revenues. While still elevated, the reduction in oil prices is starting to show up in more stable fares at some companies.
Construction and Real Estate
Commercial real estate respondents said leasing activity for office and industrial space declined sharply as businesses re-evaluate plans in the face of current uncertainties. Sales of commercial properties continue to plummet, with one contact in the industrial market saying closings had "hit the wall". Lenders are increasingly wary of raising their exposure to real estate, especially given the recent flurry in merger/consolidation activity which may elevate acquiring banks' shares of real estate loans on the books. Previously funded projects in the pipeline are expected to keep commercial construction activity solid, but there were reports that some early 2009 projects have been pushed back or halted.