September 3, 2003
Federal Reserve Districts
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Eleventh District economic activity remained generally weak from mid-July to late-August but there is improved optimism about the outlook for activity. There was little change in manufacturing or service sector activity, but retail sales were higher. Contacts at financial institutions reported slightly improved conditions. Construction and real estate markets were also very slightly improved. There was little change in energy activity, and dry weather hampered agricultural production.
Natural gas prices fell steadily throughout the period as storage continued to fill at a faster than normal pace, but prices remain high compared to this time last year. Spot prices fell to $4.60 in late July, a decline of 60 percent since February. Natural gas in storage is now only 9.4 percent below the 5-year average, and 18 percent below last year. Storage was 35 percent below the five-year average earlier this year. Natural gas going into storage this summer does not appear to be coming from new supplies, rather it is the result of "demand destruction"-large industrial users closing, cutting back or switching to oil.
Prices continue to fall for most manufactured products, including apparel, lumber and paper. Paper producers say that consolidation in the industry is keeping prices 10 percent to 15 percent higher than demand would dictate, and future price declines are anticipated. Prices for fabricated metals are being heavily discounted (or the quality of the product improved) to keep up with the competitiveness of the industry, despite rising input prices.
Paper producers say that demand remains soft even though this should be a time of seasonally increasing activity. Contacts attribute the weakness to a lack of manufacturing activity, and say that the pick up in demand for boxes to ship Christmas orders was smaller than is typical. Some paper companies have reduced their workforce to cut costs, eliminating support positions rather than production workers. Others firms anticipate some future layoffs if business does not pick up.
Construction-related manufacturers reported a slight increase in demand but expressed concern that, without a backlog of orders, the outlook for activity is uncertain. Demand for fabricated metals and lumber picked up. The increase in lumber sales was partially seasonal, and contacts say that sales are just "less horrible" than they have been in the past. Demand for brick and cement was unchanged, but competitive pressures remain stiff. Companies say they are still finishing up projects stimulated by lower interest rates, and indicated some worries that rising mortgage rates could dampen demand down the road.
Demand for primary metals has been "spotty" over the past month. Contacts say the industry is experiencing stronger demand than a year ago and quoting activity has increased. Demand for apparel products is picking up, but manufacturers continue to lay off workers to remain competitive. There was little change in demand for food products.
Orders of high-tech products continued to increase, although at a slower pace than the strong second quarter. Steady gains in personal computer and cell phone sales since the last survey continued to drive the demand for semiconductors. Asia was reported to be a hotbed for semiconductor production and consumption while demand in the U.S. was described as "better but not robust." Much of the demand for PCs continues to come from consumers, but replacement demand by businesses continues to improve. One respondent noted that there is still little hiring because companies are improving profits by driving up productivity as far as they can. Most respondents expect continued improvement for the remainder of the year.
Demand for chemicals remains weak and prices have fallen again for ethylene, propylene, styrene, polyethylene, polypropylene, and polyvinyl chloride. Demand has been sluggish domestically, and export markets are hurt by the high price of natural gas relative to oil.
A series of accidents and unplanned outages at refineries caused several spikes in the price of gasoline in July, and tightened supply enough to move spot prices over $1.10 per gallon in late August. Additional refinery outages as a result of the blackout further reduced production and impaired pipelines. Gasoline consumption for the first half of 2003 was down compared to a year ago, the first six-month decline since the 1990-91 recession. Capacity utilization on the Texas and Louisiana Gulf Coast rose slightly from 95 to 96 percent. Refiner's margins improved throughout the period, mainly on the basis of higher gasoline prices.
With the exception of higher than expected fuel prices, airlines continue to report steady improvement. Overall, airplanes are carrying more passengers and prices are moving up. As long as industry capacity stays where it is, the outlook has improved in the medium term. The outlook for trucking is "looking a little better." Rail shipments in the Western U.S. are still running slightly higher than year-ago levels. Future months could see some upward pressure on prices if rail capacity is tested with rising demand.
Construction and Real Estate
Contacts are more optimistic about commercial real estate markets. A recent pick up in leasing inquiries seems to have ended the deterioration in the office market. With little office construction underway, contacts are hoping for improvement later in the year, although it is unlikely that a noticeable turnaround will occur until 2004. Retail markets remain the best performing of the commercial sectors. Demand for industrial space was up in Houston and flat to down in Dallas.