April 23, 2003
Federal Reserve Districts
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Eleventh District economic activity was mixed from mid-February through mid-April. The energy industry, including energy-related manufacturing, picked up strongly. But other manufacturing activity was mostly flat or down. Activity in the service sector was also mixed. Retailers reported a drop in sales. Construction and real estate markets continued to be soft, and the financial service industry reported little change in activity. Overall agricultural conditions remained relatively stable in the last seven weeks.
Contacts vary in their outlook for future activity. There is optimism in some industries that activity will pick up soon, as uncertainty surrounding the war dissipates. Other contacts are more pessimistic about the outlook than they were a few weeks ago. These contacts expressed concern that the economy is not necessarily going to bounce back quickly after the war because businesses are very reluctant to make capital investments until they are certain demand is picking up in their industry.
There continue to be widespread concerns about high insurance costs. Accounting firms have increased fees to accommodate rising insurance costs and additional work imposed by the regulatory changes from the Sarbanes-Oxley bill. These firms say that their customers are having difficulty passing these higher fees on to their selling prices.
Several contacts noted that wage pressures had lessened or the company was offering smaller wage increases. Contacts say that temporary workers are commanding far lower salaries, particularly for sales and marketing, where yearly salaries have dropped from $80,000 to $65,000.
Conditions in high-tech manufacturing were flat. Contacts said the biggest obstacle to a significant turnaround continues to be weak capital spending by businesses. One respondent noted that SARS is having significant supply and demand effects in Asia, and one of their factories in Asia had been shut down for at least 10 days after a worker became infected with the illness. Overall inventory levels were reported to be lean, and productivity gains were helping to improve profits.
Demand for fabricated metals has been flat during the past six weeks and slightly down from a year earlier. Contacts said that private investment was very weak, but public spending (on construction projects) was helping to buoy demand. Demand for primary metals was also flat to down over the past six weeks, which contacts attributed to a lack of business investment due to the war and stiff competition from China. The demand for lumber has increased slightly over the past month, but contacts expect a slowdown as home building cools. Contacts in the stone, clay, and glass industries said the demand has risen over the past six weeks.
Demand for food products has slowed over the past month, and contacts say their customers are being cautious in their ordering because of the war. Demand at "white table cloth" restaurants has weakened, they say, but "middle of the road" restaurants are making up for it. Demand for paper products has been "light." Paper producers say competitive pressures have been stiff, and heavy inventories have led some companies to reduce production and lay off employees.
Strong demand and profits have led refiners to run at high levels of capacity utilization--higher than 90 percent--in recent weeks. Refineries are postponing or minimizing the normal spring turnarounds to switch from heating oil to gasoline. Demand for petrochemicals has also been strong, particularly for products tied to construction. However, high natural gas prices have led some energy-intensive plants to shut down, and all plants have struggled to pass through the increased cost of production. A substantial increase in basic chemical and plastic production was reported in early April after natural gas prices fell below $5 per thousand cubic feet.
The airline industry continues with its struggle to find the road to solvency. Demand for air travel fell as the war in Iraq started; international travel, which was also hurt in areas affected by the SARS virus, was particularly hard hit. Some carriers have temporarily suspended flights to SARS infected areas. Wage reductions and additional layoffs are reducing costs, but costs continue to rise due to a snowstorm in the Northeast and hail damage in Texas. As one contact noted, "we can't get a break."
Trucking activity improved markedly over the past four to six weeks. Rail shipments were also higher than year-ago levels, with significant increases in shipments under the category that includes military traffic.
Automobile sales in the District remain below year-ago levels, although the so-called "CNN Effect" appears to have lifted since the start of the war with Iraq.
Construction and Real Estate