October 12, 2006
Federal Reserve Districts
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The Eleventh District economy continued to cool from high levels in September. Falling fuel prices increased profits and optimism for some firms, but increased caution has crept into the residential construction and energy industries. Energy activity is still robust, but drilling has paused amid growing concern about a glut of natural gas in storage. Nonresidential construction is vigorous, and residential building is strong but continuing to cool. Manufacturing activity is also quite strong, despite slowing demand from residential builders. Retail sales were up, and demand in the service sector is still very good, but there continue to be pockets of softness. Financial service firms reported slower consumer lending, but commercial lending remained strong. Rain has slightly improved agricultural conditions.
After peaking near $78 in July, crude oil prices fell to near $60 in September. Demand for crude oil has been strong, but inventories are well above last year's level and the 5-year average. Wholesale gasoline prices fell about 50 cents per gallon in September, and the pump price fell further. Distillate prices fell less rapidly than gasoline because the winter heating season is approaching. Spot natural gas prices dipped from about $6 to just over $4 per million Btu at Henry Hub. Natural gas in storage is roughly 12 percent higher than the 5-year average. Some producers say they are holding natural gas off of the market in anticipation of the higher prices the futures market shows for winter. Other producers are preparing but not perforating their natural gas wells, so they can sell forward the initial surge of production at a higher price.
Home prices continued to rise in Houston, but in other cities softer demand has led builders to add incentives. Apartment rental rates are edging up, but at a slower pace than was expected earlier this year. Commercial builders reported higher construction costs.
Demand continued to slow for products used in residential construction, but some firms said recent slowing may have been partially weather-related. Producers of stone, clay and glass reported sales declines of as much as 20 percent from a year ago, and inventories are up for some products. Lumber producers reported a significant drop in demand and increase in inventory over the past month, mostly because of reduced demand from national markets, although sales in Texas were also weaker. Producers of wood products, such as cabinets, say demand is unchanged. A few producers of construction-related products report that some large publicly-traded builders have sent letters asking for price reductions to help them achieve quarterly income projections. This has led producers to become wary about doing business with these builders.
Fabricated metals producers report no change in sales volume but had become more optimistic. Demand for residential construction products has been soft, but sales to the energy industry remain strong. Primary metals producers reported little change in demand overall, with strong demand for commercial building helping compensate for slowing activity from the residential sector.
Gulf Coast refineries continued to operate at very high levels, near 97 percent in recent weeks. Gasoline demand fell seasonally but is still 4 percent stronger than last year. Demand softened for synthetic rubber and ethylene. Plant outages temporarily boosted ethylene prices, and contacts suggested recent weakness in sales is a result of customers using inventory in anticipation of lower prices in the weeks ahead.
Overall cargo shipping continued to increase, with some contacts noting particularly strong international activity. Railroads reported strong demand, but there has been a modest decline in trucking volume. Airlines reported a rebound in passenger traffic, with good loads and bookings for long-haul and international flights. Demand was reported as slower for short hops that are more affected by the increased hassle of increased security restrictions.
Construction and Real Estate
Apartment construction remains strong, and occupancies are still near or above 90 percent in most areas. In Dallas, demand for apartments picked up robustly over the past couple of months, boosting occupancies and rents. Houston contacts attribute some recent softness to the "Katrina effect" as evacuees leave apartments for permanent residences. With many Houston projects in the works, some contacts were concerned with the possibility of overbuilding.
Construction and demand for office space is still increasing. Contacts characterize the Houston market as "the healthiest we've seen in a long time." Dallas contacts say the large blocks of space have become more limited, shifting pricing power to landlords.
Heavy supplies of natural gas have increased pipeline pressure in parts of the country. Concern is rapidly growing about the possibility that a warm winter would sustain lower prices. Drilling has not yet been cut, which contacts say is partly because of the backlog of equipment and workers in the industry. Firms are hesitant to give up a rig or their place in line for oilfield equipment or services. While oil prices have fallen, this drilling is expected to be more immune from a price downturn because oil projects are larger and based on conservative outlooks for oil prices, have long-term horizons and deeper pockets behind them.