March 3, 2010
Federal Reserve Districts
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Economic activity improved further in the Eleventh District over the past six weeks. Firms across a wide range of industries continued to report slight increases in demand. However, conditions in a few sectors, notably commercial real estate, financial services and construction-related manufacturing remained weak. Outlooks were generally more upbeat than last time.
Energy prices declined slightly from early January to mid-February. Crude oil prices trended downward from $82 to $79 per barrel. On-highway diesel prices followed suit, falling nearly 10 cents over the same period. Natural gas prices slipped from $6 per thousand cubic feet to near $5, even as colder-than-normal weather trimmed bloated inventories back to near-normal levels. Contacts say that the approaching end of winter is keeping natural gas prices relatively steady. In contrast, prices of chemicals and related products rose during the reporting period.
Wage pressures were nonexistent. A few firms reported they either had already given, or planned on giving small pay increases to employees this year. In contrast, real estate contacts noted that people were taking jobs at reduced salaries.
Reports from transportation manufacturers were mixed. Producers of trailers reported steady demand over the past month, but said that orders were up both from three months and year-ago levels. Emergency vehicle manufacturers noted a cut back in production, and added that the outlook had weakened. An automobile manufacturer reported that sales in Texas are holding up better than in other parts of the country and the outlook is"bright", with steady growth expected throughout the year.
Reports from the paper industry were mixed. A large corrugated box manufacturer reported a moderate pickup in demand while other contacts, especially those tied to the construction sector, noted continued weakness. Respondents expect 2010 to be stronger than last year. Food manufacturers cited an increase in demand over the past month, and reported a positive sales outlook for the year.
High-tech manufacturers report continued strong growth in orders and production. Demand for semiconductors remains solid, and respondents say they are struggling to keep up with demand. Inventories are at very lean levels, and most contacts expect demand to remain robust over the next three to six months.
Petrochemical demand was mixed. Demand for products tied to domestic manufacturing rose further, while producers that sell to residential and commercial construction said domestic sales remained weak. Export demand is still strong due to the cost advantage of U.S. natural-gas based products over foreign oil-based ones, but producers say that this cost advantage has narrowed in recent weeks.
Depressed demand for refined products has further weakened margins, and contacts say refiners are responding with further cuts in utilization rates. Currently rates are below 80 percent, which excluding weather-related shut-ins, are among the lowest utilization rates over the past twenty-five years.
Automobile dealers report seasonal softness in sales over the past six weeks. Inventories remain lean, and contacts expect gradual improvement in sales throughout the year.
Contacts in accounting services say strong demand for tax and audit services is outpacing continued weakness in advisory and performance improvement services. Demand for legal services remains sluggish.
Reports from transportation service firms are mixed. Intermodal firms report no change in cargo volumes over the past month as the rise in exports is being offset by a decline in imports. Contacts in railroad transportation cite a widespread increase in cargo volumes, and noted that the outlook is more upbeat than last time. Airline demand appears to be recovering, with leisure travel seeing continued growth, business travel improving and fares stabilizing. Contacts note that demand for air travel is expected to be flat to slightly up this year.
Construction and Real Estate
Commercial real estate activity remains depressed. There is continued downward pressure on rents. Office leasing activity is still falling, albeit at a slower pace. Demand for industrial space declined further in Dallas, but improved slightly in Houston. Investment sales transactions remain low due to the tight lending environment, but contacts report that investors are watching closely for bargains. Commercial construction activity is still weak and outlooks remain grim, with most contacts expecting no improvement until 2011.