Reports from Sixth District business contacts suggested that the pace of economic activity improved in October and early November. Demolition, cleanup and repair work along the Gulf Coast was continuing, although full-scale rebuilding is not expected to be underway until early next year. Retailers' reports were positive and their outlook for holiday sales improved relative to immediately after the Gulf Coast hurricanes. Housing activity remained at high levels, although reports suggest that demand eased in a few areas. District manufacturers noted improved conditions as several facilities came back on line and post-hurricane demand boosted production in several industries. The demand for freight services remained strong around the region. Contacts in the tourism industry were upbeat despite disruptions in South Florida caused by Hurricane Wilma. Labor shortages were noted in storm-damaged areas, especially in the construction industry. Most contacts continued to note higher energy and input costs, whereas the ability to pass these higher costs on to customers was mixed.
Comments by retailers were generally more positive than in our prior report, although some noted that warm weather continued to be a drag on apparel sales. Most contacts indicated that sales during October and early November met or exceeded year-ago levels and inventories were adequate. Several retailers reported that their sales were boosted as households began the process of replacing hurricane damaged or destroyed items. The holiday outlook among District retailers also improved. Most retail contacts anticipate that sales will be modestly higher than last year.
District auto sales in October were weaker than last year. Most contacts attributed this to disruptions caused by Hurricane Wilma and the absence of new incentive programs. Contacts also noted that demand continued to shift away from full-size SUVs and trucks to smaller and more fuel efficient models. Automobile dealers in areas affected by Hurricanes Katrina and Rita reported a strong upsurge in replacement sales and strong demand from commercial customers.
Single-family home sales were flat to up slightly compared with last year, according to real estate contacts. In South Florida, some softening in demand was noted, and the surge in home sales activity in the wake of hurricanes Katrina and Rita has abated. Overall, homebuilders' reports suggest that the pace of residential construction moderated somewhat in October. Commercial real estate markets across the region continued to improve. Recovery efforts along the Gulf Coast remained focused on demolition, cleanup and debris removal. Large-scale reconstruction is not expected to get underway until early next year
Manufacturing and Transportation
Reports from the factory sector were mostly positive. Most contacts reported that high energy and raw material costs had not caused production cutbacks, and some crude and intermediate goods suppliers said that they have been able to pass price increases along to their customers. Construction-related manufacturers noted strong demand. Several manufacturers in hurricane-affected areas reported that production had resumed, including a New Orleans's coffee processing facility and two large Louisiana seafood processing plants. Northrop Grumman shipyards in New Orleans, Pascagoula, and Gulfport resumed work on a number of projects but noted that their completion will be delayed. Most District transporters reported continued strong freight demand. Repairs to hurricane-damaged roads, bridges, rail lines and port facilities continued.
Tourism and Business Travel
Reports from the tourism and hospitality industry were mostly upbeat in October and early November. Declining gasoline prices were viewed as a favorable factor for the winter season in Florida. Restaurant revenues, hotel occupancies, and room rates in South Florida were at high levels before hurricane Wilma hit. Reportedly, resorts and hotels were able to resume operations reasonably quickly in the wake of the storm, improving the outlook for the remainder of the winter season. Some casinos along the Mississippi Gulf Coast are slated to reopen in the next few months, and a scaled down version of New Orleans's annual Holiday celebration is expected to go on this year. Atlanta's World Congress Center is expected to increase staff levels to accommodate conventions that have transferred from New Orleans.
Banking and Finance
Banking conditions in the District remained generally favorable. Deposit growth was strong in most parts of the District, especially in the hurricane-affected areas as insurance claims were settled. Loan demand was also reported to be quite strong, driven mostly by real estate activity. Credit quality was described as good. While there was a surge in bankruptcy filings just before the more stringent bankruptcy law came into effect on October 17, most of the increase was anticipated. Refinancing activity slowed and commercial and industrial lending remained subdued.
Employment and Prices
Contacts reported high demand for both skilled and unskilled labor in storm-damaged areas. Skilled construction workers were in high demand where the rebuilding of commercial and residential buildings had begun, and large numbers of unskilled workers were required to help with demolition and cleanup work. Wages for construction workers have reportedly increased substantially because of the high demand.
Reports on price increases and price pass through were mixed. Transportation firms continued to add a fuel surcharge to their normal fees, and some construction companies are reportedly including clauses in their contracts to cover future material and fuel price increases. Higher input and output prices were also noted in the petrochemical sector. However, other contacts reported difficulty passing on cost increases because of competitive pressures. Some have lowered expectations for future earnings because of higher costs for commodities, packaging, transportation, and energy that cannot be fully passed on to consumers.
Natural Resources & Agriculture
Energy production in the Gulf of Mexico has improved since September, but nearly 40 percent of normal natural gas and 50 percent of normal oil production remained off-line through mid-November. Contacts reported damage left by Katrina and Rita will take at least a year to fully repair, especially the offshore pipeline system. Repairs were slow to get underway because of worker shortages in the aftermath of Katrina and Rita.
Most of Louisiana's and Mississippi's petroleum refining capacity is back on-line, but contacts reported that natural gas processing remains a concern as repair of processing facilities is taking longer than expected, with a number of locations still off-line.
Hurricane Wilma caused an estimated $1.5 billion loss in Florida crop production, with nurseries, sugarcane, and citrus reporting the largest losses. Elsewhere, dry weather contributed to healthy fieldwork rates.