Eleventh District economic activity remained weak in January and the first half of February. Retail sales improved some, but other service-sector activity continued to be sluggish, and manufacturing activity was weak. Construction and real estate activity continued to soften. Energy activity showed signs of bottoming out, but many contacts fear a collapse in natural gas prices could lead to future declines. Respondents in the financial services industry have lowered their expectations for loan demand, but note that consumer lending has held up better than expected. Agricultural conditions remained dry.
Prices and Labor Markets
There were some signs of increasing price pressures in the service sector, but prices were mostly unchanged or lower in the manufacturing and energy industries. Continued weak global demand and very warm weather in the United States have pushed down most energy prices despite stability in the price of crude. November 2001 through January 2002 was the second warmest ever recorded in the United States. Crude oil prices were pushed up to near $20 per barrel in January after OPEC and non-OPEC countries reduced production. Some contacts expressed concern that if global demand does not pick up soon, OPEC unity will be tested severely and a price collapse could follow. U.S. crude inventories are 33 percent higher than last year, and heating oil inventories are 23 percent higher than a year ago. There is still too much petrochemical capacity, and downward pressure on prices continues. Chemical inventories are very low because customers expect prices to fall further. Warm weather has limited demand for natural gas and left storage facilities very full. Companies that hold natural gas in storage will not want to hold the gas over the summer, and many contacts expect serious downward pressure on natural gas prices in the Spring. Paper producers say that selling prices continue to fall because of excess capacity in the industry.
Many industries continue to report rising costs for all types of insurance. Security costs are also rising, particularly for the airline industry. Contacts in several industries note that stiff competition has prevented these cost increases from being passed along to consumers. While labor markets have loosened, many firms say competition remains stiff for quality workers and wages are increasing for those employees.
Manufacturing activity remained weak. Producers of fabricated metals said demand continued to be very slow, while producers of primary metals, brick and tile reported a drop in demand over the past 8 weeks. Paper producers say sales are still sluggish. One contact noted that a lot of manufacturing has moved offshore, reducing demand for packaging materials produced domestically. Demand for glass, cement and concrete and food products was unchanged. Apparel producers reported an increase in sales over the past 8 weeks, because retailers are restocking after clearing out inventories during Christmas. Still more layoffs were announced in the apparel industry as the industry continues to move to lower cost off shore locations.
The high-tech industry reported that sales continued to bounce around the bottom of the cycle. While most respondents believe a recovery has begun, it is expected to be very slow. Demand for telecommunications products was still very weak, particularly in Europe, and sales of personal computers continued to be "anemic." Inventories are lean across high-tech industries, according to contacts.
Demand for petrochemicals and refined products remained weak. Some refineries have announced cuts in production while others have begun early turnarounds to produce gasoline for the spring and summer.
Activity in the service sector continued to be sluggish, although there were some areas of improvement. Temporary service firms said that demand for workers remained down, particularly to supply manufacturing and light industrial positions. Demand was strong, however, for workers to staff administrative and clerical positions, the banking and retail industries, as well as some professional services. Legal contacts say transactional activity, particularly venture capital, is slower than a year ago, but other types of business activity is starting to improve. Litigation and bankruptcy work remained strong. Accounting firms say activity remained strong for auditing and taxes but consulting work had declined. Demand for transportation services was still weak, but is showing signs of slowly improving from the very depressed level a couple of months ago.
Retail sales improved some in February from a very weak January. Contacts say this is a difficult time of year to infer trends from sales data and remain conservative with their purchases despite recent signs of a pick up. Retailers are happy that inventories have been drawn down. One contact explained that stronger-than-expected sales could result in a brief price spike which they would prefer to having too much inventory. Auto sales have been solid and better than expected following the low interest rate deals from last year. Inventories are a little high and the average gross profit on auto sales is down.
Loan demand declined seasonally as expected at levels slightly lower than a year ago. While contacts have generally lowered their expectations for activity, they note that consumer lending has been stronger than expected. Commercial and industrial lending has been flat to moderately positive. Credit conditions are mostly unchanged, with only a couple of contacts reporting an increase in delinquencies. Credit standards remained stable since the last survey, according to contacts, and are not expected to change in the near future.
Construction and Real Estate
Activity remained weak over the past 8 weeks. There was a slight uptick in leasing activity in the Dallas area, stimulated by free rent and other incentives. Contacts say long-term leases are only being signed with deep financial concessions. Rents have declined 20 percent and are not expected to increase this year. The Houston market has been jolted by the sudden addition of substantial office space, leading to uncertainty about how low the occupancy rate could fall.
Residential activity is still weak, and potential homebuyers continue to back out of deals, according to contacts. Existing home inventories have risen as people continue to leave houses they can not afford. Demand for multifamily housing is also weak and concessions are prevalent. Demand remains solid, however, for lower priced homes.
U.S. drilling activity showed signs of bottoming out in recent weeks, but there are concerns about future declines. Some projects are being delayed and contacts say the possibility of a collapse in natural gas prices could lead to a decline of as many as 150 rigs. International drilling is also seeing some delays, although day-rates for rigs in the deep Gulf and key international markets continue to hold up well.
Overall conditions remained dry despite heavy precipitation in mid-February. Land preparation for corn and cotton is proceeding on schedule except in a few areas where producers had to wait for the ground to dry out. Despite low prices and a large surplus of cotton, farmers are continuing to plant as if it was a normal year. Ranchers are reducing livestock herds because dry conditions have prevented pastures from reaching their usual winter production levels.