July 28, 2004
Federal Reserve Districts
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Eleventh District economic activity continued to expand from late June to mid-July. Manufacturing activity increased and activity strengthened in the service sector. Retailers reported some softening of sales growth over the past few weeks. Construction and real estate activity continued to improve. The financial services industry said lending was up slightly, but deposit growth has softened because money is returning to financial markets. Energy activity was mostly unchanged. Agricultural conditions remain favorable.
Crude oil prices remained volatile, peaking at an all-time high on June 1, drifting down in mid-June, and then surging back up again. Domestic consumption of crude oil has softened in recent weeks, falling back to levels near a year ago. Inventories are back up to the five-year average. Natural gas prices have stayed relatively high, between $6 and $6.50 per thousand cubic feet.
Producers of fabricated metals report that shortages for some inputs are driving up prices and causing some construction projects to be delayed or cancelled. Primary metals producers say rising input costs are being passed along to customers, although margins are less than a year ago. Shortages of scrap remain a concern. Contacts say that China was driving up the prices of scrap a few months ago, but now it's the domestic steel mills driving up prices.
Producers of clay, cement, brick, tile and glass continue to report cost pressures from higher input and transportation costs. These producers say they are able to pass some of these cost increases on to customers. Prices are up for paper, recycled materials and pulp. Strong demand combined with capacity limits pushed up prices for chemicals, such as chlorine, benzene, styrene and polyvinyl chloride, although price increases slowed for other chemicals. Apparel manufacturers say that prices continue to decline.
Price reports from retailers were mixed. Some retailers say customers are less resistant to price increases and selling prices are up, particularly for women's apparel. Other retailers say price competition remains stiff and, after experiencing some pricing ability earlier this year, discount stores advanced their clearance sales by three weeks.
High-tech manufacturers reported mixed results. Some contacts said sales were slower in the second half of June and others reported some recent pickup due to low inventory levels. One respondent noted that sales contracts are being written for much shorter periods than they were three or four years ago and that this likely reflects the continued uncertainty about the outlook. Telecommunication manufacturers report slight gains in hiring and wages, but contacts remain cautious.
Gasoline demand dipped slightly in recent weeks, falling back to the levels of a year ago. Refineries along the Gulf Coast operated at capacity utilization rates of 97-98 percent through June, according to producers, who said that gasoline inventories are still near the bottom of the five-year average. Refined product imports were at high levels, but did little to help gasoline inventories, especially for reformulated gasoline. Chemical producers report strong demand.
Summer airline traffic has been solid, but airlines report that increased industry capacity and higher fuel costs have impaired profits. Trucking activity remains strong, and firms report a shortage of qualified truckers. Demand for rail shipments also continues to be very strong. Some manufactures expressed concern that railroad congestion was making it difficult to get raw materials from vendors and finished products out to the market.
For the first time in several years, telecommunications service firms say demand is picking up from both residential and business customers. The industry remains competitive, and prices continue to fall. There are also reports of some limited hiring.
Construction and Real Estate
Demand for industrial space rose steadily over the past six weeks according to contacts. Office demand picked up among larger tenants recently, according to contacts, and concessions continued to decline. Sill, rents remain depressed.
Producers say balance sheets are quite strong, but there is no where to invest all the money because domestic drilling is constrained by a lack prospects and international drilling is limited because oil prospects are concentrated in high risk, politically volatile countries. Most producers are using cash flow to repurchase their own stock.