April 20, 2005
Federal Reserve Districts
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Eleventh District economic activity expanded moderately in March and early April. The manufacturing sector continued to rebound, while activity in financial and business services continued to expand at the same pace reported in the last Beige Book. Retailers said they were disappointed with recent sales growth. Residential construction continued to cool from last year's strong pace, amid signs that commercial real estate markets were slowly improving. The energy industry strengthened further, and contacts said exploration activity was expanding on the belief that energy prices would remain high. Agricultural conditions remained generally positive. While activity was strong in some industries, in many sectors contacts reported slightly less optimism about the strength of activity for the rest of the year, largely because demand has not been picking up as quickly as they had hoped.
Most manufacturing and service sector contacts expressed concern about rising cost pressure for utilities, transportation and petroleum-based products, such as Styrofoam and plastic bags. A weaker dollar contributed to increases in the cost of some imported raw materials. The ability of firms to push through these cost increases remains mixed. Some companies have reduced energy consumption to mitigate cost increases, and others have increased selling prices and/or reduced profits. Uncertainty about energy prices has added caution to the outlook for activity.
There were still reports that the accounting and energy industries were having difficulty finding qualified workers, and competition between banks for quality workers is bidding up salaries and benefits. A few firms say they are considering capacity expansion that would require adding workers, but are waiting for demand to strengthen before making these investments.
Demand for paper products softened slightly in recent weeks. Contacts reported reduced demand for corrugated boxes for durable goods. Demand for primary metals and lumber was unchanged. Lumber contacts reported that inventories are high. Apparel manufacturers said demand was unchanged over the past few weeks, which is lower than a year ago. Stiff global competition continues to force producers out of the apparel business. One contact expects demand to drop by about 15 percent during the summer and plans to lay off some workers at that time.
There was little change in the growth of orders for most high-tech products. A rise in orders for communications equipment, industrial switches and medical instruments stimulated a slight pickup in demand for semiconductors. Sales of consumer electronics and personal computers were reported as unchanged.
Demand for basic petrochemicals continued to be very strong. Petrochemical prices are up, and producers say that margins are very strong. New capacity is not expected to provide price relief until mid-2006 at the earliest. Refiners reported that strong product demand and limited capacity allowed increased profits on both light, sweet and heavy, sour crude, despite sizable increases in crude oil prices.
Demand for trucking has leveled off but remained above last year's levels. Railroads and airlines reported strong demand. Airfares were up in some markets, but contacts said fare increases were too low to cover growing fuel and other costs, such as escalating landing fees. Respondents say continued financing for bankrupt carriers is hindering a return to profitability.
Auto sales were weaker than a year ago, and dealers said inventories are slightly too high. Sales have been softest for domestic brands, SUVs and trucks. Most manufacturers say they have taken incentives off of the market because they can not afford to continue them.
Construction and Real Estate
Overbuilding in apartment markets remains a concern, according to contacts, particularly in Dallas and San Antonio, but development in Austin is in line with demand. Leasing activity in office markets continued to gain steam, mostly due to expansion by smaller tenants. In Dallas, pockets of strength are spurring plans for new office construction.
Contacts say there are more signs that the industry believes higher oil prices will last because price movements are being driven by the market bumping up against capacity constraints rather than by an OPEC production cut. As a result, producers are considering oil and natural gas from coal-bed methane, tight gas, tar sands and gas shales. Service companies are interested in creating new products that support this unconventional resource development.