January 17, 2007
Federal Reserve Districts
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The Eleventh District economy continued to decelerate from mid-November to early January. Activity in the energy sector remained at high levels, but growth was slowing. Manufacturing activity softened. While still strong, service sector activity slowed some. Retail sales growth was weaker than expected, but contacts said growth improved in late December and early January. Overall construction and real estate activity was quite strong but continued slowing. Consumer lending moderated. Commercial lending was strong but expected to slow. Rain improved agricultural conditions, but high costs and low yields have reduced profitability.
Contacts in a number of industries were more optimistic about the outlook than at the time of the last Beige Book--partly because sales growth has not deteriorated as much as they feared.
After strengthening in December, energy prices declined in early January but remained relatively high and a concern for many firms. Henry Hub prices for natural gas fell from $8 to about $6 per million Btu.
A major inventory adjustment led many chemicals derived from natural gas to see rapid price declines, including record drops for ethylene and propylene. There were large price declines for polyethylene and polypropylene. Inventories had been built up last summer to protect against any shortages that might be caused by hurricanes and ensuing major plant outages. The inventories were cost effective while natural gas prices were rising, but the recent decline in natural gas prices prompted a rapid reduction of inventory that pushed petrochemical prices down sharply. Weak demand also contributed to price declines for polycarbonate, polystyrene, PET bottle resin, and PVC. In contrast, some oil-based petrochemicals, such as synthetic rubber saw excellent demand, low inventories, good pricing, and solid margins.
The paper industry continues to struggle with weakening demand, high inventories and input costs that are rising faster than selling prices. Sales have been weaker than expected for producers of automobiles and high-tech products, causing some of these manufacturers to temporarily shut down factories during the holidays and/or slow hiring.
High-tech firms say that there is uncertainty about the outlook for sales growth. Most contacts believe sales will pick up after a slow first half of 2007, but some fear there may be a more serious downturn. Inventories are mostly in good shape, according to firms, who report some build up and uncertainty about how much stock is being held by distributors and retailers. There was optimism that the finalizing of telecommunications mergers will free up capital spending in the coming year.
Sales of food products unexpectedly rose more than the typical December gain. Producers supplying equipment to the energy industry continue to report strong demand and backlogs. Petrochemical exports increased strongly, with shipments of some products jumping 30 percent. Strong Asian demand was stimulated by declines in product prices and the value of the dollar. The rush to export resulted in a logjam of railcars at the Port of Houston, and railroads imposed embargoes and rationed capacity.
Refinery production on the Gulf Coast sagged in late November and early December, but utilization rates returned to high levels by year-end. A prolonged fall turnaround season was responsible for the slack in December production, and a heavier than normal schedule of maintenance is expected this spring. Refiners have run plants hard in response to high margins and are using the turnaround period to improve plant performance, but delays are expected because engineering and construction firms are stretched thin, and craft skills are scarce.
Law firms said demand had improved over the past six weeks, driven by mergers and acquisitions and real estate transactional work. Accounting firms reported little change in demand. Accounting companies are still hiring, and say that it is increasingly difficult to find both experienced accountants and new college graduates.
Demand for rail transportation was strong and increased slightly, with particularly high shipments of grain, chemicals and petroleum products. Trucking activity picked up robustly in December after an unusually weak November. Shipping firms reported good volume growth in both their freight cargo and domestic small parcel business, and indicated that shipping rates were likely to increase in coming months. Airlines reported a weak start to December but a good sales pickup over the holiday season and good bookings into January.
Construction and Real Estate
Apartment occupancies declined in Dallas and Houston over the past six weeks, but contacts said the decline was expected as Hurricane Katrina evacuees continued to move out. Despite the decline, overall occupancy rates remain above 90 percent. Austin's apartment market was performing better than most--with an occupancy rate of 96 percent and rising rental rate.
Office demand remained strong. Landlords saw multiple tenants compete for unoccupied blocks of space in Dallas. The Houston office absorption rate in 2006 was three times that of 2005. Rent continued increasing at a strong pace. Contacts are optimistic that demand will remain positive in 2007.
Deposit growth has slowed, and contacts say deposits are increasingly difficult to obtain from both consumer and commercial customers. Pricing of all types of loans is still aggressive, but credit quality remains solid.