April 26, 2006
Federal Reserve Districts
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Eleventh District economic activity continued to strengthen in March and the first half of April. The energy industry remains very strong, while activity continued to pick up in the manufacturing and service sectors. Construction and real estate activity accelerated, boosted by vigorous homebuilding and mounting commercial construction. Contacts in the financial services sector report little change overall. Agricultural conditions are poor.
Crude oil prices increased from near $60 per barrel in early March to over $70 in mid-April. Heavy maintenance at refineries reduced demand for crude putting downward pressure on prices, but this was offset by international tensions in oil-exporting countries like Nigeria and Iran. Oil inventories have built to very high levels, well above any recent history, presumably as a precaution.
Gasoline prices increased 25 cents per gallon at the pump during the period, pushed up by strong demand, rising crude prices and shortages of ethanol, an additive that is being used in the transition to low-sulfur, non-MTBE gasoline. Diesel prices increased 10 cents at the pump. Natural gas prices remained near $7 per thousand cubic feet, held down by heavy inventories, which are now more than 60 percent above normal and well above the 5-year maximum.
Wage pressures are building for some industries, stiff competition is limiting profitability and the ability of firms to raise salaries. However, an increasing number of industries report that they must and are increasing salaries to obtain and retain workers.
Demand remained strong for construction-related products, such as lumber, fabricated metals, stone, clay and glass; and capacity constraints were limiting some production. Apparel producers report an increase in demand, and sales of food products is up slightly. High-tech manufacturers reported good, steady growth in sales and orders. Respondents say most of the output gains are coming from continued strong productivity growth rather than hiring. Inventories are at desired levels. Prices are not declining as fast as normal, they say, and profits are increasing.
Petrochemical production is weaker than a year ago. Prices fell for most petrochemical products, but some prices still remain above where they were prior to the hurricanes. Stronger prices in the United States than in other parts of the world are attracting petrochemical imports. With increased imports and relatively low prices abroad, domestic producers of petrochemicals are finding smaller markets for their products. The industry continues to recover from the hurricanes, with some plants just now coming back on line. Some producers are going through an extensive maintenance that was postponed by the hurricanes, and this is affecting the ethylene market, in particular.
Refiners also had a long maintenance season, and refinery utilization rates have been low. Inventories of raw gasoline are at 5-year highs, but refiners lack sufficient quantities of the additive ethanol that is now required in most gasoline sold in the United States from late spring to early fall. Refined product imports have settled back to historical ranges, after soaring to as high as 5 million barrels per day after the hurricanes.
Demand for transportation services remains strong and up significantly compared with last year. Railroads are planning to build additional rail lines to increase capacity. Trucking firms continue to report difficulty finding qualified drivers. Demand for air travel is strong, and contacts say forward bookings look good. Airlines report that reduced domestic capacity has increased load factors and that, along with rising fares, is helping them keep up with soaring fuel costs.
Auto dealers report flat demand and very slow sales for cars and trucks made by American-owned companies. Inventories are very heavy for some vehicles, pressuring dealers to lower prices and bring back rebates for those models.
Construction and Real Estate
Apartment leasing continues to increase, and contacts say demand is stronger than usual for this time of year. Inventories remain at good levels with only moderate construction planned for this year. An exception is San Antonio, where contacts are concerned that there may be too much building. Apartment rents are up in Houston, but rents are not firming as much as expected in Dallas/Fort Worth and Austin.
Commercial construction activity is strengthening. Demand for retail space is strong in all the major metropolitan areas. Office and industrial occupancy continues to rise, which is spurring construction activity. Houston will see a good bit of construction this year, with several new industrial development projects underway near the Port of Houston and strong demand for professional and medical office space. Dallas office demand has picked up, say contacts, with some suburban sectors nearing full occupancy, according to contacts. However, downtown Dallas continues to have ample vacant space. Contacts expect commercial construction to be especially strong in Austin.
Recent rains have improved planting conditions and spurred land preparation for spring planting in East and Central Texas, but overall moisture levels were still below average. Crop insurance may be the only way that some producers can cover their costs, according to contacts, who say that dry conditions and high energy costs are making the production outlook uncertain. Even with insurance program payments, agricultural lenders expressed concerns that statewide credit quality conditions may deteriorate in the second half of the year.