April 15, 2009
Federal Reserve Districts
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Economic conditions in the Eleventh District remained weak from mid-February to the end of March. Contacts across a broad range of industries including manufacturing, retail, residential construction and financial activities reported that they were seeing signs of stabilizing at low levels. Other industries, such as oil and gas extraction, employment services and intermodal transportation noted sharp declines. Financial services continued to report low lending activity due to weak demand and tight credit standards. Drought conditions and low margins continue to put a financial strain on District farmers and ranchers.
Prices for light sweet crude were near $40 per barrel in late February, but rose to over $50 per barrel in late March. Contacts said that much of the increase seemed to be driven by news of additional fiscal and monetary stimulus and data indicating greater stability in the economy. Natural gas prices fell under $4 per thousand cubic feet for the first time since 2002, but moved back over $4 as crude prices rose and economic news improved. Respondents felt that fundamentals remained negative, however, with winter ending and weak industrial demand, steady production, ample inventories and a forecast of cool summer weather.
Most construction-related manufacturers reported that after another sharp decline in February, orders flattened out in March. An exception was the fabricated metals industry which reported a sharp decline in orders over the past 30 days. Many construction-related contacts reported very low levels of capacity utilization with some firms reporting levels below 50 percent. Several reported temporary plant shutdowns and continued layoffs. Most contacts expected the current weakness to persist throughout 2009 with residential starts showing no improvement and non-residential construction continuing to weaken.
High-tech manufacturers reported that after steep declines in February, demand has started to "bounce across the bottom." Semiconductor contacts reported that conditions are particularly weak in memory chips which will likely experience an L-shaped recovery with an extended bottom while logic chips should see a U-shaped recovery. Demand has been particularly weak for producers of equipment used in chip production with sales down by two-thirds to three-fourths from two years ago. High-tech manufacturers report that they have been able to keep inventories low so that when demand begins to increase it will translate quickly into increased production. One respondent noted that the current downturn in high-tech is much worse than the high-tech recession in 2001.
Paper producers reported that demand has flattened since the last survey. Some contacts reported that employment has stabilized after significant cutbacks last year. Inventories were mixed with some contacts reporting desired lean levels and some reporting excess inventories. Most contacts expect demand to improve near year-end.
Petrochemical producers generally indicated that the free fall of late last year is over and there was growing stability and even a small turnaround in operating rates. Contacts reported that ethylene and a number of other chemical and plastic products have clearly bottomed out after massive industry destocking last fall. Contacts said that no one is buying inputs without an order in hand, leaving demand still erratic and unpredictable. Operating rates are slowly moving up however, from 70 to 75 percent.
Refinery capacity utilization remained weak and near 82 percent, but part of the weakness was due to normal spring turnaround and maintenance, and the switch from heating oil to gasoline production. The demand for distillates (diesel and heating oil) fell seasonally, and prices along with it. Refinery margins improved from the very low levels early in the year, but are still depressed.
Auto dealers reported generally flat sales over the past six weeks, with year-over-year demand down about 40 percent. Sales continued to be weak for both domestic and imported brands. Respondents reported that while credit remains tight, the major factor suppressing demand was low consumer confidence due to job losses, loss of household wealth, and uncertainty about the economic outlook. Most expect continued weakness through the end of the year.
Demand for legal services continued to soften. Contacts reported that demand continued to be concentrated in litigation and bankruptcy, while there is little corporate, real estate, or transactional demand. While demand for bankruptcy-related services has increased slightly since last Beige Book, it has not yet increased as much as contacts expected at this point in the recession. According to contacts, if litigation and bankruptcy don't pick up as they normally do, "it's going to be ugly." Legal demand that had been coming from abroad is still very tight or basically cut off. Demand for accounting services is steady and continues to be concentrated in tax and audit. Both legal and accounting firms expect growth to be essentially flat this year and noted that receivables are harder to collect.
Airline demand has weakened slightly over the past six weeks with demand weakening the most for business travelers and international flights. Contacts said that they are dropping fares in response to lower demand and lower fuel prices. Contacts in container trade and intermodal transportation report that cargo volumes have been down over the last 30 days. Declines in both domestic and international activity have contributed to the fall off. One exception is small parcels. On a seasonally adjusted basis, small parcel growth has been improving since last October. The pick-up has been led by express air volumes, although ground volumes have also improved somewhat since January. Contacts in rail transportation said that there has been some pickup in demand in the past six weeks. Significant volume increases were observed in motor vehicle shipments, although the pickup followed a sharp decrease in the beginning of the year when many auto plants were temporarily shut down. Pronounced declines were seen in shipments of lumber and wood and in non-metallic minerals.
Construction and Real Estate
Apartment leasing activity steadied in the first quarter after a dismal fourth quarter. Despite the better than expected demand, contacts say occupancy rates and rents will soften in coming months due to the high volume of construction activity in the pipeline. Rent cuts are already prevalent in the Austin area where demand is weak and new projects continue to be completed. Office and industrial leasing activity continues to decline, and rental concessions are rising.
Contacts say office sublease space is growing modestly as companies downsize. Commercial real estate investment activity is being hampered by worsening credit availability "that is very close to a complete absence of lenders." Contacts remain very uncertain in their outlooks, but are hopeful recent government initiatives will lead to some improvement in coming months.
Contacts reported that commercial real estate loans are basically nonexistent and maturing loans are being renewed at lower leverage/size, while some are not eligible to be renewed. Contacts have seen a continued slowdown in consumer loan demand with credit card purchase volume falling.
Contacts have continued to see some deterioration in credit quality and report maintaining tight credit standards. Contacts have also continued to price loans off LIBOR or set floors on the prime rate. Deposits are relatively stable, but difficult to grow due to short-term interest rates essentially at zero. Outlooks remain weak although most contacts were slightly more optimistic compared to the last survey.