March 5, 2003
Federal Reserve Districts
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From early January through mid-February, overall Eleventh District economic activity exhibited signs of inertia. Manufacturing activity remained lackluster. Service sector activity was mixed, with signs of a pickup in some industries and severe financial problems in others. Retail sales remain weak, and there is still little change in the financial services industry. Construction and real estate markets continued to decline. Energy activity picked up only mildly, despite a sharp increase in prices. Overall agricultural conditions were good.
Geopolitical uncertainties still dampen consumer and business confidence. High energy prices also weigh heavily on the outlook for some industries. Hiring is minimal, according to contacts who say investments are on hold until questions surrounding the war are resolved. Contacts report that concerns about terrorism seem to be distracting attention from normal business.
Cold weather and rising crude oil prices also pushed natural gas prices upward. Several waves of bitter weather have pulled natural gas inventories down 20 percent below year-earlier levels, and raised concerns about their adequacy to deal with a late winter blast of cold weather. Propane prices have risen along with natural gas--reaching the highest level in 13 years. Higher energy prices have pushed up chemical and plastic prices. Healthy demand for housing is driving price increases for chlorine and polyvinyl chloride (PVC).
Rising cost pressures--particularly from energy, shipping, and insurance--were noted by most industries. A few firms were able to pass along price increases, but international competition and overcapacity is making that difficult for most manufacturers and retailers. Some contacts suggest that energy price increases will be passed onto consumers if they persist. A few firms expressed concern about how long they could operate if energy costs remain elevated.
Demand for fabricated metals was flat in January and February, and producers were guarded about the outlook for activity over the next year. Sales of primary metals picked up in January but then fell in February. Producers say that sales are slower than a year ago. Metals producers reported some increases in selling prices, partially passing along rising costs for scrap metal and reinforcing steel. Producers of stone, clay, and glass were surprised by better-than-expected demand over the past two months, but expressed increased uncertainty about the outlook. Paper and lumber producers report soft sales during the same period, partly because of import competition. Paper producers expect little change in sales growth because international competitors are absorbing market share, especially China.
Demand for apparel products is up. Production of private label apparel is increasing, according to contacts who say that selling prices continue to decline, even as energy prices are pushing up production costs of petroleum based fabrics.
The high-tech industry reported a slight pickup in sales since the last survey. One source of moderate improvement has been increasing orders from businesses for replacement hardware such as routers, computers, and monitors. One respondent noted that this might be the beginning of a replacement cycle; businesses remain conservative, but after so little spending in the past couple of years, feel the need to replace old equipment. Consumers continue to buy video and computer gaming systems and products, and there has been a pickup in demand for high-definition TVs and flash memory. Inventories remain very low. There is still too much capacity in the telecommunications industry, although there has been some pickup in demand for mobile phones and other consumer products. Contacts say the recent FCC decision has delayed a potential stimulus for capital investment in the industry, dampening the outlook for telecommunication equipment firms.
Refinery utilization on the Gulf Coast, which was running at about 95 percent in early December, fell to the mid-80 percent level as Venezuelan crude oil shipments were disrupted. Utilization improved slowly in early February. There have been sharp reductions in both crude and product inventories, with crude inventories 25 percent below last year and near critical levels needed to maintain normal operation of the refinery system.
Demand for petrochemicals has been generally weak over the past two months, but is still up 5 percent to 6 percent above last year. One exception is PVC, where demand has been very strong to supply the housing market and Asia.
Demand for legal services remains steady, particularly for litigation, bankruptcy, labor, and regulatory work. Real estate and lending activity are still quiet, but there are some signs of a pickup for transactional and venture capital activity. Legal contacts say activity will remain flat to moderate until corporate confidence improves. Demand for accounting and consulting activity remains solid, partly because firms continue to benefit from the Anderson fallout. The Sarbanes-Oxley bill is boosting demand for risk management and audit work.
Many small businesses are struggling, particularly those that supply the high-tech industry, and contacts say there is a huge shake out going on. One company is requiring cash up front for new business because they have depleted all reserves. This firm said they are reinventing their company regularly to find new ways to support their customers.
The airline industry remains in a tailspin. Demand for air travel continues to be extremely price sensitive, and already strapped carriers are having difficulty passing higher fuel costs on to passengers. The snowstorm on the East Coast added another financial blow. A significant drop in aircraft values has tightened the availability of credit for airlines.
Construction and Real Estate