October 21, 2009
Federal Reserve Districts
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Economic conditions were little changed in the Eleventh District in September and early October, but there continued to be scattered signs of improvement. Activity remained flat at low levels across most sectors, with the exception of high-tech, food, petrochemical manufacturing and staffing industries, which saw a pickup in demand. The labor market remained weak and no notable pressures on wages or prices were reported. While contacts noted that they were seeing a bottoming out in activity, many were uncertain about the timing and strength of the recovery.
Crude oil prices stayed in a range between $65 and $75 per barrel from mid-September to early October. Heating oil prices were seasonally weak heading into winter, as distillate inventories rose to 25 percent above the five-year average range. Natural gas spot prices in one key market briefly fell below $2 per Mcf but mostly remained in a range of $2 to $3.60 during the reporting period, some of the lowest prices since 2002. Natural gas storage has risen to record levels, and contacts are concerned that storage may fill before the heating season begins, putting even more downward pressure on prices.
Respondents in high-tech manufacturing said that production and new orders increased since the last report. Contacts noted that orders had picked up strongly from retailers and intermediate buyers that had sharply reduced inventories in the first half of the year. Demand from Asia was reported to be strong, and there was a better-than-expected increase in orders for products that contain logic devices such as netbooks and notebooks. Respondents expect demand to remain strong through year-end, although most expect growth in orders to level out in the first quarter of 2010.
Conditions in transportation manufacturing remain weak, with one respondent noting "we are trawling at the bottom of the sea." Many expect flat demand in the near term, but are hopeful for a possible recovery in late 2010. Most respondents in the paper industry said demand continues to stabilize at weak levels, while food manufacturers said demand had picked up slightly and was better than a year ago.
Petrochemical demand varied across products. Demand for polyvinyl chloride, which is used most often in construction products, is weak domestically. But export demand is very strong, boosted by the low cost of natural gas-based petrochemical products from the U.S. over oil-based ones supplied internationally. Still, the increase has not been enough to absorb excess capacity in the industry overall. Products sold into general manufacturing have seen improved domestic and export demand, and capacity utilization is on its way to returning to normal, according to contacts. Demand for oil products remains weak relative to a year ago, but is up from summer levels. Refiners reduced output due to poor margins and high product inventories. There were reports that planned projects, and even routine maintenance, were being deferred to conserve capital.
Automobile sales have declined sharply since the end of the cash-for-clunkers program. The program helped clear out old inventory and boosted dealer profits, but now that it has ended, car dealers are nervous about how long it will take before demand returns back to normal levels.
Demand for legal services remains depressed, with the exception of regulatory, and pharmaceutical litigation and bankruptcy business. Legal firms report that receivables are slowing and getting more difficult to collect, especially from real estate clients. The outlook is bleak, and contacts note that if deal workout and litigation business does not pick up, "things could be ugly" by year-end. Contacts in accounting services reported steady, moderate demand.
Intermodal firms report that falling import demand has led to a decline in cargo volumes over the last 30 days. Small parcel shipping and large freight volumes increased in September, continuing a trend that began in July. Shipping contacts report an improved outlook for the fourth quarter as they expect their clients to restock depleted inventories. Contacts in railroad transportation noted steady cargo volumes at low levels. Significant increases were observed in motor vehicle shipments due to the cash-for clunkers program, while pronounced declines were seen in shipments of lumber, wood, crushed stone and non-metallic minerals. Airlines say that business demand has stabilized at low levels. While revenue forecasts remain weak, there is growing optimism among most contacts.
Construction and Real Estate
Nonresidential construction activity continues to decline. There were several reports that the only "sure" business will come from government stimulus projects, although funding for such projects has been slow to materialize. Contacts noted hotel, apartment, industrial, retail and office sectors are overbuilt, and property values continue to move down. Respondents say it is still a struggle to get financing for new private commercial projects and for investment in existing properties. Scattered reports among contacts suggest the number of interested investors sitting on the sidelines is growing.