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In December and early January, Eleventh District economic activity grew at a slightly slower pace than reported in the last Beige Book. While prices of most manufactured products were flat or down, services and some construction-related industries saw price increases. Manufacturing and retail firms reported slightly slower sales growth, while service industries said sales growth was up. Most contacts anticipate� but have not seen�effects from the Asian crisis; a few attributed recent price and sales declines to the situation. Energy and construction activity remained strong. Loan demand was unchanged, and agricultural conditions remained favorable.
Prices
With the exception of food and some construction-related products, most goods-producing contacts reported prices decreased or remained steady. In contrast, service industry contacts reported rising prices. Contacts in the lumber, retail apparel, paper and metal industries expect the Asian crisis to cause price declines in coming months.
Prices of poultry, feed grain, beef, pork loin, pine lumber, memory chips, crude oil and refining products were reported to be down. A few retailers reported they are also seeing lower prices for a variety of Asian imports. Contacts attributed much of the decline in memory chip prices to worldwide excess capacity, but also believed events in Asia played a role. Contacts reported crude oil prices were hit hard by unseasonably mild weather, the resumption of Iraqi oil sales, and expectations of a decline in Asian demand. Crude oil prices, which averaged $21 to $22 per barrel in October, slipped to about $17 by early January. Retail gasoline, heating oil and natural gas prices were also reported to be down.
Prices of primary and fabricated metals, plastics, petrochemicals, telecommunications products, and paper were generally flat. Petrochemical prices held steady despite the addition of three ethylene facilities over the past month because strong construction activity in late 1997 depleted inventories of construction-related plastic products and the petrochemicals from which they are made.
Prices increased over the past six weeks for fruits, vegetables, some processed foods, hardwoods, brick and cement. Food industry contacts reported prices rose because of a cold snap which knocked out 80 percent of Mexico's crops. Contacts reported that high levels of construction activity led to increased cement prices and shortages of skilled workers in construction and construction-related industries. Brick and hardwood lumber producers said wage increases fed through to product price increases of 2 percent to 3 percent since the last survey.
Service-producing contacts reported increases in prices in the past six weeks. Passenger airlines reported unusually high demand for the post-Christmas season, with record load factors and an 8-percent fare increase. Service sector growth translated into increased recruiting of skilled and semiskilled workers, higher compensation, and in most cases, higher prices, although there were some reports of squeezed profit margins.
Manufacturing
Growth in sales was slightly lower for manufactured products. Sales of semiconductors and heating fuels, and some construction materials�such as fabricated metals, cement and some lumber products�softened slightly over the last six weeks. Economic turmoil in Asia reduced sales of some manufactured products, particularly semiconductors, but the magnitude of the effect is not yet known. One semiconductor producer noted that, while his revenue forecasts have not changed significantly, the uncertainty surrounding the forecasts has increased sharply because of events in Asia. However, manufacturers of telecommunications equipment and lower-priced microprocessors reported continued, steady growth. Sales of products used in residential construction rose slightly. Shipments of paper products are down seasonally, but strong year-over-year, and inventories remain low. Sales of apparel increased. Warm weather reduced sales of heating oil and natural gas (and increased inventories) but also stimulated unusually strong winter gasoline sales.
Services
Business service firms reported an increase in activity late last year driven by strength in mergers and acquisitions, real estate transactions, banking and manufacturing. Business service contacts expect reduced demand from customers who export to Asia. Freight forwarders reported a decline in export tonnage. Domestic cargo shipments remained strong. Although some contacts reported improved rail service during the past six weeks, others saw little improvement in bottlenecks.
Retail Sales
Retailers reported that sales were slow in the first part of December but picked up strongly right before and right after Christmas. Contacts indicated that overall sales were less than in previous years, partly because of increased competition. Retailers also reported sales were lower because consumers now spread their purchases over the entire year and spend more of their income on leisure activities. Retailers said inventories have been in good shape for some time, and as a result, markdowns have not been big.
Financial Services
Loan activity kept a constant pace, contrary to some respondents' previous expectations of slowing in the fourth quarter. Competition for commercial loans remained strong but eased for consumer loans. Delinquency rates remained stable "at comfortable levels." Preliminary reports were mixed about the use of home equity loans that became available in Texas at the first of the year. Consumers and bankers were still learning the details of the new law.
Construction and Real Estate
Construction and real estate activity continued to expand, led by increases in residential and office construction. Despite increased construction, strong sales of single family homes left inventories low. Builders of lower-priced starter homes reported that lower interest rates are stimulating sales. Office rents continued to rise sharply, and similar increases are expected in 1998. Although current construction is expected to be absorbed, an increase in speculative building left some contacts concerned about possible overbuilding in the future. Pre-leasing was down in the industrial real estate market, but demand was expected to keep pace with new supply through 1998.
Energy
Demand for oil field services remained very strong, with continued reports of inadequate capacity. Weak energy prices had not yet affected drilling activity, and are not expected to do so unless prices fall to less than $17 per barrel for a sustained period.
Agriculture
Overall agricultural conditions remained favorable. Small grain production benefited from wet weather in most areas. In the northern portion of the District, however, snow and cold temperatures hurt some livestock operations.
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