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Overall Eleventh District economic activity continued to cool in October and November but remained at moderately high levels. Some contacts believe stock market volatility and increased uncertainty have affected the business environment, while heavy rainfall impeded construction progress and damaged unharvested crops. Still, most contacts were optimistic. Demand for business services was strong. Manufacturing activity was slightly slower, and retail sales grew at a slightly slower pace. Real estate activity also softened. Lending growth was slower, and bankers continued to tighten credit standards. Agricultural bankers expressed concern about the financial viability of some crop producers.
Strong demand and low inventories kept energy prices high. The price of light sweet crude oil consistently sold on the spot market for prices above $30 per barrel, with prices reaching $34-$35 per barrel. Crude oil inventories fell and are now 9-10 percent below the levels of last year. Primary heating oil inventories also remained very low, as much as 30 percent below the levels of last year, despite high levels of output from U.S. refiners. The arrival of cold weather in the Midwest and Northeast drove wholesale prices over a dollar per gallon in early November. Refiners' margins have been very high. Natural gas prices are up 60 percent from a year ago and are setting record highs; inventories are about 9 percent under the levels of a year ago. Competition for limited resources is leading to rising prices for oil services and machinery. Prices for drilling equipment have increased slowly in this oil cycle, despite high oil and natural gas prices.
Some business service firms also reported increasing fees, with others planning fee increases early next year. However, there were many reports of falling prices. Retailers said that selling prices were at the same level or lower than a few weeks ago. Petrochemical prices continued to fall, and producer's margins are being squeezed by high natural gas and oil prices. Rising chemical production capacity, both domestically and in Asia, are adding to inventories, pushing down the price of key products such as polyethylene, polypropylene and polyvinyl chloride. Telecommunications equipment prices are relatively flat and beginning to fall because of intense competition and rising inventory levels of equipment.
Labor markets remain very tight in the service sector, but continued to loosen in manufacturing. Service firms say the tight labor market is leading to wage hikes. Hiring has become easier for some manufacturing industries, while others are no longer hiring or are reducing their workforce. Despite the looser labor market, manufacturers said wages were up 3 percent to 4 percent.
Overall manufacturing activity continued to soften over the past six weeks but remained at moderately high levels. Cold, wet weather dampened sales of many construction-related products, such as cement and concrete. Brick sales softened faster than the normal seasonal decline. Contacts disagreed about how fast sales had softened, with some reporting a "slight" softening and others reporting "considerable" softening. Brick inventories are still low, but are growing. Demand for primary metals has weakened from very strong to "fairly" strong, with weak demand for the metal extrusion, truck-trailer and automotive industries but strong growth for drill pipe used in the oil field. Sales of fabricated metals cooled but remain at high levels, with continued strong demand for metals used in the semiconductor and telecom market. Telecommunications equipment manufacturers reported slowing demand and rising inventory. Contacts say they are keeping costs low while working on the next generation of technology, when they expect sales will explode again. Refiners are operating at high levels to take advantage of strong profit margins.
Demand for business services remained strong since the last beige book. Temporary firms reported robust sales, and said they are pleased that the normal seasonal pick up occurred as usual. Temporary firms reported strong demand for their services from all sectors of the economy. Legal firms continued to report signs of a slowing economy, with increased demand for bankruptcy and litigation work. Accounting firms said demand was slower for their services, which they attribute to uncertainty surrounding the financial markets and the presidential election.
Retailers reported slightly slower sales growth over the past few weeks. Sales growth softened in late October and early November but picked up significantly over the Thanksgiving weekend. Sales at discount stores tended to be stronger than sales at higher end stores, and several retailers said they discounted selling prices more than usual. Contacts were happy with the level of sales and relieved that sales growth had picked up over the weekend. Auto dealers reported slower sales growth, and said inventories are higher than desired and growing.
Lending growth softened, particularly for autos and real estate, leading contacts to be more cautious. Lending was still strong to industries benefiting from high oil prices. In general, large banks reported more slowing than smaller, community oriented institutions. Interest rate spreads have begun to cause some concern on the part of banks. Banks continued to tighten credit standards, and competition among banks is becoming less of a concern. Respondents reported no appreciable change in loan quality, but quarterly reports suggest that credit quality is weakening.
Construction and Real Estate
Real estate activity remained "fairly strong" according to contacts but continues to decline from the very high levels reported earlier in the year. Construction activity has also declined. Demand for commercial space was "relatively quiet" in recent weeks, which contacts attributed to seasonal slowing, as well as stock market and presidential election uncertainty. There continues to be little commercial construction, and contacts say secondary capital markets have a lingering perception that Texas markets are overbuilt, despite low vacancy rates in several areas. Multifamily markets are being swamped as new construction comes on line. Rent concessions have increased, with apartment owners offering incentives to lure tenants, such as three months free rent. Home building is strong in Houston but has slowed in the rest of the District, which contacts attribute to weaker demand and heavy rains.
The domestic rig count flattened in recent weeks, and contacts feel this may be the maximum for a while because of limited equipment and labor. There is growing competition for rigs and crews both abroad and at home. The complexity of drilling projects continues to grow, with increased oil-directed, deep drilling in the Gulf of Mexico. Revenue for oil service companies is also helped by more international work, particularly in Latin America and the Middle East.
Heavy rainfall improved growing conditions, helping freshly planted wheat and oats, aiding forage growth and replenishing stock ponds. Some areas are receiving replacement livestock but herd culling and supplemental feeding continued in other areas. The rain was too late to help summer crops that were being harvested and further damaged these drought-ravaged fields. Some agricultural bankers are expressing concern about the future viability of some crop producers, and note that government payments have prevented significant loan repayment problems.