November 28, 2007
Federal Reserve Districts
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The pace of economic activity in the Eleventh District decelerated further from mid-October to mid-November. Manufacturing activity continued to weaken, and demand for business services was softer. Retail sales were weaker than expected. Financial service firms reported slower consumer and commercial lending. Home real estate markets and construction continued to soften, but commercial and multi-family building and markets remained strong. Energy activity picked up. Agricultural conditions remained generally positive.
The level of uncertainty remains quite high, and some firms say it has increased over the past month. Most industries expect activity to pick up in 2008, but the expected timing of the rebound varies from firm to firm.
Higher energy costs are putting upward pressure on selling prices for most industries, but competitive pressures continue to restrain price increases for many firms. Shipping firms say rising fuel costs have pushed up prices, and some expect further price increases in January. Airline fares are also higher.
Manufacturers continued to report cost pressures from higher fuel, raw materials and import price pressure from declines in the value of the dollar. Price pressures continue to be a serious concern for the food industry. Costs are high or rising for many products, which contacts attribute mostly to increased demand for corn to make ethanol. Prices have recently risen sharply for wheat and flour, in part because production was displaced for corn.
Some high-tech manufacturers reported continued good sales, but other said sales were slower, leading them to reduce their outlook for activity. Demand for food products is stable, although producers say there has been some shifting of consumption to lower-priced foods. Paper producers say demand for recycled paper is very high, but a noticeable drop in sales of corrugated boxes to manufacturing and construction has caused inventories to rise. Transportation manufacturers report stable demand. Auto producers say inventories are a little high.
Domestic petrochemical demand was still weak, with slow sales to homebuilders and auto producers. A weak dollar and favorable feedstock prices are still spurring strong export demand, but higher feedstock costs have driven up prices for some chemicals, hurting sales. Refiners were reluctant to build crude inventories with current prices well above futures.
There has been little change in demand for accounting and legal firms. Accounting firms reported steady demand and a very good outlook. Law firms report a pickup in bankruptcy and litigation work that is sufficient to offset slower real estate and corporate transactions. Contacts say the recent shift in legal activity usually signals a slowing economy.
Overall shipping activity has been weaker. Intermodal firms say imports have fallen and are not being completely offset by export growth. Small parcel volume has been decelerating over the past two months, but large freight volume appears to have increased. Railroad volume is still strong but weaker than a year ago, with particularly weak shipments of motor vehicles, lumber and wood.
Airlines reported strong demand and no sign of weakness in bookings. Capacity is flat to shrinking. Contacts are very concerned about rising fuel costs and the possibility that a slowing economy might affect business travel, but said they are hoping for a soft landing.
Construction and Real Estate
Office leasing continued to expand, although growth is still slowing from last year's pace. Office rents have risen strongly in most metropolitan areas, but some contacts are uncertain they will hold up because of new construction and the deceleration in demand for space. Office fundamentals remain quite good, according to contacts, but investment activity is still being hampered by difficulties obtaining credit. A few contacts say commercial credit availability deteriorated in November after improving in September and October.
Consumer lending has softened, particularly for automobiles. There has been a slight shift toward credit card lending and away from home equity lending. Real estate lending for the most creditworthy borrowers has increased as mortgage rates have chased the 10-year Treasury rate down. Commercial lenders say some of the recent slowing in lending may be seasonal, but most of their clients have revised down their outlook and anticipate further softening in the economy.