September 6, 2006
Federal Reserve Districts
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Eleventh District economic activity grew quite strongly from mid-July to late August, but there were more pockets of softness than in the last report. The energy industry is still expanding as rapidly as possible. Service sector activity is strong, although a few contacts noted some possible signs of weakness. Manufacturing activity is high but continued to cool. Real estate activity remained robust. A slight slowing in residential activity was offset by swelling nonresidential building. The financial services industry reported good overall credit quality, but consumer lending has weakened some. Agricultural conditions are still very dry.
In general, contacts blame recent pockets of softness on weakness in national housing markets and on high gasoline and electricity costs, which have dampened consumer spending. Several respondents said they have recently become more cautious about the outlook for activity, and some firms were adjusting inventory management or business plans to be more cautious about the possibility of additional slowing growth.
Some prices were lower, mostly as a result of weakened demand. Some retailers said stiff competition had resulted in larger markdowns. Prices were lower for a few construction-related inputs, such as steel and aluminum. Gasoline prices remained high but are trending downward, with the average retail pump price falling under $2.70 per gallon in late August.
Reports of worker shortages have become more numerous and, in some instances, more forceful. There are shortages of skilled workers for a broad range of occupations, including in oil field services, construction, accounting, trucking, engineering, and financial services. Non-skilled workers are also increasingly in short supply. A temporary service firm says one manufacturer is hiring workers without experience and paying them minimum wage to undergo training for a few weeks before being accepted as temporary workers.
More contacts expressed difficulty finding workers who can pass drug tests or provide papers proving that they are legal. Concerns about immigration reform have become palpable. A large commercial construction firm said disruption to the immigrant flow is the biggest threat the construction industry has faced in many decades.
Orders softened slightly but remained quite strong for construction-related products, such as lumber, stone, brick, glass, primary and fabricated metals. Some contacts noted a drop in demand from home builders, with a brick producer reporting a sharp increase in cancellations. Others said orders for nonresidential construction were keeping activity strong. Overall uncertainty had increased, but contacts were optimistic that orders would bounce back, suggesting that the recent slow down in residential construction might be partly due to hot weather.
Reports from the high tech sector were mixed. Demand remained strong for some products, particularly for newer technologies. One manufacturer said that his biggest problem is trying to find additional capacity to fill orders. Demand continued to soften for older technologies, such as lower-end PCs and memory chips. Contacts say it is unclear if orders will continue to slow or are just pausing.
Despite high prices, gasoline consumption was up roughly 2 percent from last year. Demand has also been strong for most major petrochemicals. Renewed exports helped ethylene sales bounce back, as the weakness in natural gas prices relative to oil prices has reopened export markets for U.S.-produced ethylene. Polyethylene and polypropylene plastics have also experienced strong domestic demand.
Paper producers said sales were flat over the past month. Food producers say sales volume has been unchanged.
Activity in the transportation sector continued to increase, although there was a slight decline in airline bookings and cargo volume. Shipments of construction-related materials dropped off sharply. Traffic volumes for grain also softened because dry weather has weakened crop production. The trucking industry says the outlook has improved because of growing international trade and expansion at the Port of Houston.
Auto sales were mixed. Some dealers reported a slight increase in volume but others reported substantial declines. Sales continued to be strong for luxury and fuel efficient vehicles, but sales of pickup trucks have been particularly poor.
Construction and Real Estate
Contacts say office leasing activity has been strong over the past six weeks, with more requests for larger blocks of space from local firms and relocations. New development has picked up in several areas, especially in Dallas. Respondents say construction is based upon fundamentals, with demand and rental rates justifying the additional space. Other nonresidential segments, like retail, continued to see increased construction activity, but a few contacts said the amount of construction warranted watching. Public construction activity remained robust.
Demand for oil services and machinery remained strong, with continued large backlogs and limited service capacity. Service firms reported pricing leverage, and said they are building most of their increased revenue supporting strong international activity.