June 13, 2007
Federal Reserve Districts
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The Eleventh District economy continued to expand at a moderately strong pace in April and May. There was modest improvement in the service sector. Manufacturing remains at a moderately high level. Home sales and construction continued to soften, but commercial building is robust, and leasing was more active than expected. Commercial lending continued to increase, but consumer lending still softened. Energy activity has flattened at a high level. Agricultural conditions are mostly favorable.
Many contacts have become more optimistic about the outlook for economic activity, partly because the actual effects of weakening housing markets and the pullback in subprime lending has been less than feared. Nevertheless, high freight and energy costs remain a concern for most contacts.
There is widespread concern about inflation in food prices. While higher freight and energy costs have contributed to higher prices, contacts in several industries say increased demand for ethanol has led to very high corn prices that are pushing up prices of many products, including corn starch, beef, poultry, eggs and dairy products. Several contacts said the price of milk powder--a partial substitute for milk as well as an ingredient in other products, such as bread--is at an all-time high and is expected to continue rising. Agricultural producers say the high cost of fuel and fertilizers are boosting costs.
Construction costs remain high, and contacts say building material prices are moving up again, including copper, steel, aluminum and composite aluminum substitutes. Land prices remain very high. Office rents are rising more than expected. Home prices continue to soften, however, and prices have fallen for products sold to home builders, such as lumber. Auto dealers say rising incentives and rebates have resulted in lower selling prices.
Some firms continue to report hiring and wage pressure for unskilled workers and managers, but other firms say this market has loosened some. A few firms are laying off these types of workers to increase productivity. Most homebuilders are reducing staff because of weaker sales, and the market for subcontractors has softened.
There was little change in demand for construction materials, such as stone, clay and glass. The volume of new orders and sales remained flat or below last year's levels for all respondents. Orders from home builders remained soft, but demand remains solid for commercial construction and home remodeling. Inventories are higher than desired. Demand for lumber products was mixed. Some producers say demand is steady, particularly for upscale housing and commercial building, but sales to middle and low-end home builders remain sluggish. Producers of primary metals report some softening of demand in the past month, although they say activity is not as sluggish as earlier this year. Demand continues to be weak to supply residential construction, and contacts say less expensive imports are eating into market share.
High-tech activity is mixed. Several firms report continued moderate sales growth. Some contacts have seen recent improvement that has led them to be more optimistic, but others say there is still a lot of uncertainty in the industry. Excess inventory of some products, such as memory, has led to some stockpiling, but inventory is tight for other products, such as silicone and glass for flat panel computer screens. Overall, input costs are down, and selling prices are on their typical downward trend.
Gasoline demand remains healthy--with inventories 6 percent below their five year average--output is well above a year ago, and imports are strong. Chemical production is above last year's record pace. Domestic demand for petrochemicals has been modest, although there has been some recent improvement, partly to rebuild inventories. Export demand remains vigorous. Higher costs have squeezed margins some, although margins are generally healthy. Synthetic rubber is an exception, where domestic demand has been hefty and higher costs have been easily passed through to selling prices.
Transportation activity has improved. Trucking business has picked up. Cargo volumes have improved at small parcel shipping firms. Container trade remains robust, with growth largely from overseas markets. Airlines report vigorous international activity. Domestic demand remains moderate. Costs continue to rise, particularly for fuel, but competition has pushed down fares.
Construction and Real Estate
Commercial markets improved. There are signs that office leasing is picking up. Construction of office space is still strong in Dallas and picking up in Fort Worth, Houston and Austin. Warehouse leasing activity improved. Industrial investment remains steady, and selling prices are high but attractive to investors because they are much less expensive than coastal markets, according to contacts.
International activity is growing; with large, long-lived projects; backed by sponsors with deep pockets; using sophisticated, high-margin services. Rigs continue to leave the Gulf of Mexico, attracted by higher rates in the strong international market.