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Overall Eleventh District economic activity increased in May, despite some evidence that financial conditions have affected the economy. Demand for business services was still very strong, and energy activity continued to accelerate. Manufacturers generally reported increased or continued strong demand, and financial service contacts said loan demand was mostly strong. Retail sales growth decelerated throughout the month however, and residential construction activity declined. Agricultural conditions remained difficult, although government payments have helped the financial condition of producers. Many contacts indicated increased uncertainty about the future, but their outlooks remained positive.
Overall price pressures were up, led by energy and manufactured products, the latter partly a result of higher energy prices. Low inventories contributed to sharp increases in energy prices. Crude oil prices rose from $25 per barrel in late April to $30 per barrel in mid-May and spot natural gas prices rose to over $4 per thousand cubic feet. Natural gas storage was 23 percent below year-ago levels on May 1, and hot weather nationally stimulated demand, which prevented storage from filling. Inventories of gasoline also are low, which has pushed gasoline prices up 35 percent over the last six weeks. Currently, there are no shortages of gasoline, but there are concerns that there will be strong demand in the United States for summer driving and that imports will be limited by strong demand in Europe as well. Diesel prices also rose by about 10 cents per gallon because stocks were depleted by strong demand from truckers and farmers. Petrochemical producers expect to boost their prices significantly if prices for natural gas feedstock remain high, and they expect strong demand for petrochemicals will allow them sustain the increases. Prices for brick and glass products were also up and are expected to rise further, which contacts attributed to higher natural gas prices. Rising wages and a shortage of some chips was putting upward pressure on some electronics prices. Computer manufacturers said the movement away from desktops to notebooks is resulting in higher selling prices because notebooks cost more. Higher prices were also reported in the service sector. Some service firms said greater client demand was making it easier to pass along salary increases to fees, but others said competition remains significant and is limiting fee increases. Cement, concrete and lumber prices declined slightly.
Labor market tightness continued to be reported in nearly all sectors. The energy industry is having problems hiring large numbers of workers, and contacts said the industry's reputation as an unstable employer is not helping. Auto dealers reported upward pressure on wages for mechanics. Service firms said wages and salaries have risen in almost every area, and an employment agency added that anyone who has not been convicted of a violent crime, is drug-free, and can show up and work 8 hours a day has a job if they want one. Some manufacturers reported that the scarce supply of skilled workers is translating to general wage pressure throughout the industry. Many firms now offer training, which they say is a big change from just five years ago. The recent stock market drubbing and shakeout of "dot.com" companies has led to a slowing of the skyrocketing salaries in the legal industry and a halt to the exodus of labor, such as lawyers and MBAs, to Internet companies. One contact said that some employees have recently asked to return.
Manufacturing activity was up, with strong demand for energy and high-tech products. Producers of computers and other high-tech machinery reported a significant increase in orders from the first quarter. A shortage of some processors was limiting production of computers. A large computer manufacturer said domestic consumer sales weakened over the last two weeks, but noted that demand is strong from almost all areas of the world and is optimistic sales will remain strong. Petrochemical producers reported extremely strong domestic demand and improving demand from Asia and Europe. Refiners also reported extremely strong demand. Supplies are so tight that every refinery shutdown was immediately reflected in spot and futures prices. The seasonal maintenance period is now coming to an end, but Gulf Coast refiners generally operated at high levels throughout the period. Demand for apparel products was up over the last few weeks, and contacts reported little change in the demand for brick, glass, primary metals and food products, with most reporting strong demand. Fabricated metals producers also reported continued strong demand, with particularly brisk sales to the energy and high-tech industries. Demand for concrete and cement was unchanged since slowing in the first quarter. Demand for lumber and wood products declined over the past three months and the decline accelerated over the last two to four weeks. Weak demand and mild winter weather, which allowed for more logging, has resulted in an oversupply of lumber.
Demand for business services continued to be strong, and nearly all firms reported more activity than at this time last year. Temporary service firms said demand has been good from most sectors of the economy, and one firm said demand is at its highest level in recent memory. Accounting and legal firms also reported strong demand, but demand for legal services from dot-com companies has slowed as a result of weakness in financial markets and fewer IPOs. Most transportation firms reported generally strong demand. Trucking activity picked up recently, particularly for oil and construction. Airlines said that demand remains strong, but railroads reported weaker demand growth.
Retailers said sales growth was strong in early May but decelerated during the month, ending with a poor couple of weeks. While some contacts said unseasonable weather probably affected sales, most believe it is possible that consumers are slowing purchases as a result of weakness in the stock market and higher interest rates. Some retailers lowered their sales outlook slightly. Auto sales remained strong.
Loan demand remained mostly strong, according to contacts, who are generally optimistic about business activity in the near term. Banks reported a slight slowing in real estate loans, but all other loan categories have experienced stable to strong demand. In some cases, loan demand is still outstripping supply.
Construction and Real Estate
Homebuilders reported slower traffic and sales over the past few weeks. Order backlogs fell, with some people removing themselves from the backlog because they no longer qualify for a loan or chose not to pay higher interest costs. Still, contacts said building remained at a good pace. Overall commercial development continued to slow. Contacts said some small speculative shopping mall and office projects were put on hold because of interest rate concerns. A few large commercial developments and shopping malls are helping boost activity, however. Demand for office space picked up in recent weeks as new corporations are moving to the area and soaking up space. Concerns about overbuilding are dissipating and plans for speculative building have revived for larger projects, and contacts say these larger projects will not be affected by interest rate increases.
Energy activity continued to accelerate. Oil service and machinery companies said the last pieces of the healing process from the 1998-99 downturn are falling into place. Contacts reported growing backlogs, and some companies are working around the clock to meet demand. The Texas rig count rose sharply over the past six weeks, from near 300 to 323. Gas drilling is leading the recovery. Drilling in the Gulf of Mexico returned to late 1997 peak levels, as the search for gas pushed producers offshore to deeper, more complicated, and expensive projects. International activity remained slow but continued to improve. Contacts say the "super-majors" are still digesting the last round of mergers and are moving slowly--trying to impress Wall Street with efficiencies rather than drilling activity.
High winds and hot temperatures slowed land preparation and stressed crops and forage across most of the District. Soil moisture remained low in many areas. The condition of the Texas wheat crop was rated 39 percent of normal in May. Range conditions have been poor and wheat grazing was difficult. As a result, livestock were being heavily culled at light weights. There continue to be some producers going out of business and large ranches converting into recreational properties.