July 30, 2003
Federal Reserve Districts
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Eleventh District economic activity continued to show signs of improving in June and the first half of July, but growth remained slow. Contacts are becoming increasingly confident that the economy is expanding, but the speed of the recovery remains in doubt. Manufacturing activity was mixed, but demand for business services was expanding, albeit sluggishly. Retailers reported some pick up in demand in July, but say sales are only increasing marginally. There was little change in demand financial services or construction and real estate activity. Drilling for oil and natural gas moved to new highs in recent weeks, but the rate of increase has slowed substantially. Weather has hampered agricultural production.
Other prices were falling. While still high, natural gas prices weakened throughout the period, as mild weather in the Midwest and North East allowed record levels of injections into storage. Storage levels remain 25 percent below last year and 15 percent below the 5-year average. Petrochemical prices have fallen with natural gas prices. Prices are lower for olefins, polyethylene, polypropylene, bottle resins, polyvinyl chloride and polystyrene. There were other reports of lower prices for manufactured products. For example, brick producers said prices were a bit softer. Apparel prices are lower and are expected to continue to decline. Prices have also fallen for paper products, despite rises in energy costs. There continues to be downward pressure on prices for primary metals, and contacts say inventories have gotten "a little big."
Several industries continue to report pressures from insurance costs, particularly in the service sector. The upward pressures appear to be subsiding for some types of insurance, but health insurance costs are still skyrocketing, and some firms say these rising costs are being passed on to employees.
Respondents in high-tech manufacturing reported a significant increase in sales and orders since the last survey. Consumer products and personal computers drove the improvement, although communications equipment also picked up. One contact noted that firms are interviewing more job candidates in preparation for future hiring. Contacts report that inventories relative to sales remain lean. Most respondents reported that the recovery is likely to continue over the next six months. One respondent noted, however, that while orders have picked-up, contracts have been shorted from a year to about three-to-four months-indicating some uncertainty about the durability of recent gains.
Demand for stone, tile, brick and glass was flat to higher over the past six weeks but below the levels of a year ago. Demand for products used in new homes was mostly unchanged, but contacts said demand has been inconsistent making it difficult to predict a trend. Demand for primary metals products was flat over the past six weeks, which was considered lackluster by contacts because demand is usually up seasonally this time of year. Sales of paper products have been slow, down 3 to 4 percent compared to a year ago. Demand for apparel products continues to be weak, while sales of food products were mostly unchanged.
Sales of fabricated metal products picked up during the past six weeks but remained below the levels of a year ago. Demand was higher for aluminum cans and construction-related metal products, particularly due to a rise in retail and industrial construction. Lumber producers also reported an increase in demand over the last couple of months, but sales are below the level of a year ago and some contracts that are already on the books are being cut down in volume.
Refinery capacity utilization on the Gulf Coast fell from the very high levels of recent months, and outages in early July pulled utilization down further. Despite high levels of gasoline imports, there was little refill of inventory in recent weeks. Weak domestic and export demand, along with high costs, have led to reductions in petrochemical production levels. High natural gas prices have pushed up costs and led to production cuts for natural gas-intensive chemicals, such as methanol, ammonia, olefins and chlorine. The gas processing industry, which thrives on high oil and low natural gas prices, has also cut production with the situation reversed. The bellwether olefin plants on the Texas Gulf Coast (ethylene, propylene) are operating at minimal levels needed to justify keeping the furnaces on.
Accounting firms reported a slight slowing in demand over the last couple of months, which they attributed to extended deadlines under Sarbanes-Oxley. However, activity remains fairly solid across the board, particularly in audit and tax reform, and the transactional side is showing "glimmers of optimism." Transactional work is expected to slowly progress, but may open like a floodgate if the speculation about a pent-up need for investment is true. There have been a few significant increases in capital spending, mostly on upgrades in hardware and software. Demand is still very weak from the telecom industry, and one contact noted that their manufacturing clients are increasingly nervous over the rise in offshore competition. Contacts report a slowdown in receivables as more clients stretch out their payments.
Activity in temporary staffing picked-up somewhat in the second quarter compared to the first quarter, but contacts reported no significant rise in any particular sector. There continues to be little demand from large companies because most are still undergoing a lot of consolidation and restructuring. There have been more requests for proposals from the telecom, healthcare, government and education sectors, although contacts were cautious that firms may simply be looking for lower prices rather than planning to increase demand.
Airlines continued to report steady improvement, but respondents indicate that the current environment remains delicate. Capacity is down from earlier years, but airplanes are flying more passengers and revenue is rising. The trucking industry remains very competitive and there has been little change in activity or the outlook. Contacts in the rail industry report an increase in shipments compared to a year ago, particularly in the Western United States.
Construction and Real Estate