June 10, 2009
Federal Reserve Districts
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Economic conditions in the Eleventh District remained weak from mid-April to late May, but there were increased reports of stabilization. Contacts in several industries said demand had improved slightly or had firmed since the last survey. Many characterized current conditions as bouncing along the bottom. While outlooks were slightly more optimistic than in past surveys, most contacts said they remain extremely cautious and do not expect any sustained improvement in the near term. Labor market conditions remain soft as firms continue to implement hiring freezes in the face of uncertainty.
Most manufacturers said selling prices were flat to down, and there were few reports of any expected increases in the near future. The exception was in the petrochemical industry where prices for some products had edged up with the increase in oil prices. Some manufacturers said input prices had stabilized recently, although there were several reports that construction-related input costs continued to fall.
Light sweet crude oil prices rose from $50 to $60 per barrel from mid-April to late May. U.S. inventories tracked downward in recent weeks, but remain about 15 percent above the 5-year high. Natural gas prices fell back below $4 per Mcf, and contacts expect prices to remain weak over the summer months. Pump prices for gasoline rose 38 cents per gallon during the survey period.
High-tech manufacturing contacts reported orders had improved slightly since the last survey. Most respondents said the improvement came because business customers were no longer severely paring down inventories. Despite ongoing cautiousness about the outlook, contacts expect a gradual improvement over the next six months.
Paper-related demand was mixed. Contacts in the corrugated box industry said sales had picked up in the past 30 days and outlooks were more favorable. In contrast, orders for printing paper continued to fall as consumers continue to demand fewer printed materials, such as newspapers. Contacts were attempting to clear inventories and there were reports of employment cuts. Demand for food products held steady at current levels and contacts expect conditions to remain much the same in the coming months. Transportation manufacturing activity remains depressed by slow auto and aircraft orders, yet sales of some specialized products have picked up. In particular, a producer of industrial-use trailers noted consistent sales improvement over the past 45 days and is hiring back half of the workers laid off last year.
Many petrochemical products are over-supplied given current weak economic conditions. There were reports of plant shutdowns, although some existing plants had come back on line after hurricane and maintenance problems. Most contacts said orders were weak, although export demand was stronger for ethylene and polypropylene producers as higher oil prices and lower natural gas prices make these domestic gas-based products a bargain.
Refining capacity utilization rates stayed in the 82 to 84 percent range during the survey period and remain about 7 percentage points below a year ago. Respondents said demand for gasoline is down 2.6 percent from a year ago, and demand for distillates is down more than 15 percent as poor economic conditions reduce consumption of diesel fuel. Refinery margins remained relatively weak as oil product prices rose by about the same amount as crude oil prices.
Auto dealers said sales continued to hold steady at low levels. Several contacts said the industry has likely hit bottom and will be "scraping along" for some time. Overall, respondents' outlooks remained grim for the rest of the year, although some were encouraged by recent gains in consumer confidence.
Demand for legal services remains soft, especially for corporate and transaction-related services and real estate-related services. Contacts report they are seeing more business deals fall apart, which has started to lead to a pickup in bankruptcy and litigation. Still, the increase is expected to be less than in previous recessions, as more companies appear to be working disputes out themselves in order to avoid legal costs. Several firms reported layoffs, and some had cancelled or scaled back their summer internship programs. Accounting contacts said demand was steady. A seasonal slowdown is expected now that tax season is over.
Eleventh District-based airlines reported weak conditions as concerns about the H1N1 virus dampened already low international and business travel. Low demand has prompted deep fare sales in recent weeks. Despite steady to slight increases in future bookings, airline industry outlooks remain negative for the year. Transportation service contacts in cargo and container trade reported a recent pickup in demand and were hopeful this was a sign that the economy was bottoming out. Still volumes remain well below year-ago levels. Intermodal cargo volumes rose slightly over the past month as export demand improved, and contacts said water-based container trade volume increased. Railroad respondents said volumes declined across the board following a pickup noted in the last survey. The railroad industry outlook remained grim for 2009, but contacts said it looked like the economy was bouncing along the bottom.
Construction and Real Estate
Commercial leasing activity continues to soften, although contacts say conditions in Texas markets remain much better than elsewhere in the country. Sales transactions for commercial real estate properties are almost nonexistent, but contacts say the number of investors waiting in the wings continues to grow, which should lead to more sales by year-end. According to respondents, the re-pricing of properties will be painful but necessary. While some contacts expressed growing concern about the renegotiation of maturing commercial real estate loans, there were reports that credit markets are "beginning to thaw" and that real estate lenders are becoming more interested in making loans on very good deals.