June 16, 2004
Federal Reserve Districts
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Eleventh District economic activity continued to expand from mid-April to early June. Manufacturing activity was up, and contacts were generally more optimistic about the outlook for the sector. Demand for business services is increasing but remains slower than contacts expected. Retail sales were mixed. Construction and real estate markets strengthened, while financial services activity continued to improve. Energy activity remains relatively strong but has responded little to the recent spike in prices. Agricultural conditions continue to be favorable.
After over two years of contacts expressing caution about the economic outlook because of geopolitical fears, these concerns were notably muted in this report. One retailer explained that consumer spending was not affected by the terrorist acts in Spain, suggesting that these worries have finally receded to a more normal level. Concerns are now focused on the high cost of energy and potential governmental changes, such as an increase in the minimum wage and problems with school finance in Texas. Some contacts noted concerns that the Texas Legislature might raise sales or other taxes hurting business.
Increasingly, there are reports that rising energy costs are pushing up selling prices for manufactured products. Prices are up for petrochemicals, plastics, steel, aluminum, lumber, paper, liner board, cement, brick, tile, glass, ceramics, corn, rice, wheat, cheese, milk, and ice cream. Retailers said downward pressures on selling prices have abated. Although list prices were mostly unchanged, retailers say they are taking smaller mark downs, so consumers are paying higher prices for many products. Stiff competition is keeping downward pressure on selling prices for apparel manufacturers and telecommunications services.
High-tech manufacturers said sales growth continued at the good pace recorded at the last survey. Orders for semiconductors have been volatile, according to manufacturers, because buyers, particularly from China, often order large quantities to get price discounts and then refrain from ordering for several months until inventories are pared down. Demand was strong for products such as hand-held devices and, in particular, two-way radios.
There has been slight improvement in the demand for telecommunications services. These firms say they continue to find ways to cut costs, either through their hiring practices or by outsourcing. Demand is unchanged for telecommunications manufacturers.
Strong demand for gasoline is helping refiners earn record profit margins. Gasoline demand is estimated to be 2 percent to 4 percent higher than a year ago. Refiners are operating at very high levels to supply gasoline and are paying premiums to purchase gasoline-rich sweet crude to improve the gasoline output relative to other products. Still, gasoline inventories remain at the bottom of the five-year average. Although imports have been strong, refiners say they are having difficulty meeting the new low-sulfur requirements that went into effect nationwide in January. They are also having trouble supplying "boutique" fuels that have tougher environmental requirements and are required in the northeast and California. The annual spring change-out of high- for low-volatile gasoline is complicating the inventory problem, according to contacts. The low-sulfur and boutique requirements pose a particular problem because they cannot be replaced easily by imports.
Demand for petrochemical products is strong, particularly for ethylene. Demand for polyethylene has also improved, following weak demand during the spring. Export demand for ethylene and polyethylene is strong, with most going to Asia.
Demand for rail shipments remains strong, which one contact attributed partially to higher fuel prices leading shippers to switch from trucking to rail because railroads are more fuel efficient. While the demand for air travel has increased recently, airlines continue to report that the industry is having trouble taking off. Increases in industry capacity and fuel costs are squeezing profits. Relatively newer, low-cost airlines without union contracts are in the best shape.
Construction and Real Estate
Contacts are generally optimistic that commercial real estate markets are recovering. Office leasing activity has picked up, and contacts say companies are not only renewing contracts but are expanding. Office rents have stabilized, and there are fewer concessions. Investor activity in the Dallas market remains strong. Industrial demand has also picked up some over the past six weeks.
Domestic drilling remains at a high number of rigs working--500 in Texas. However, they are mostly land-based rigs seeking shallow natural gas for a quick return. Offshore activity remains weak. Lucrative work in the Gulf of Mexico picked up slightly, only to fall back to levels near the trough of the last drilling downturn in 2001. International drilling activity continues to increase slowly, rising to a 10-year high in April.
U.S. agricultural exports picked up, which contacts attribute to the declining dollar. There were concerns, however, that the preliminary World Trade Organization ruling against cotton subsidies would negatively affect farmland values, cotton producers, lenders and possibly subsidies for other crops.