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Overall Eleventh District economic activity decelerated slightly in January and February. Some industries continue to report very difficult conditions, but several others reported a mild rebound since the last Beige Book. Orders fell for several manufacturers, with sharp drops at some high-tech firms, but construction-related manufacturing rebounded slightly, and orders for energy-related products remained strong. Demand growth for business services continued to soften, but contacts emphasized that conditions are not dire. Retail sales rebounded in January, but year-over-year growth weakened again in February. Overall construction and real estate activity picked up slightly over the past six weeks after weakness in the fourth quarter of 2000. The financial services industry reported loan demand continued to soften, but asset quality and credit standards remained unchanged. The energy industry is still a bright spot, with continued increases in international drilling, but contacts say a lack of labor, machinery and management focus are constraining drilling activity. Rain improved agricultural conditions.
Prices
Price reports were mixed. Several industries said higher energy prices were boosting selling prices, but other industries said competition is preventing them from passing these costs on to consumers. OPEC production cutbacks boosted oil prices slightly over the past six weeks, but warming weather pushed down heating oil and natural gas prices. U.S. heating oil and natural gas inventories have increased, after falling to critical levels in late December. Heating oil inventories are now above the levels at this time last year, but natural gas inventories are still 30 percent below normal. Natural gas prices have fallen slightly but remain very high by historical standards. With 25-30 percent of U.S. ethylene production closed down, petrochemical inventories have declined and spot prices have increased, allowing producers to cover feedstock price increases. Following heavy discounting in December, retailers reported little change in selling prices in February. Most retailers said inventories are in good shape but some said they were a little lean. Price increases for single family housing have not been as strong in the first two months of 2001 as last year.
Labor Markets
Labor market conditions continued to loosen, with several contacts reporting that they are laying off, no longer hiring or having less difficulty hiring workers. A few contacts were pleased that the labor market had loosened because they had been forced to hire workers whose skills were lower quality than desired. These firms expect productivity increases as they lay off the less skilled workers.
Manufacturing
Overall manufacturing activity declined since the last Beige Book. High-tech firms reported a sharp drop in consumer and business demand, and contacts expect continued weakening. Contacts also noted that major global accounts are freezing IT budgets. Excess inventories do not appear to be a major concern, however. PC sales slowed again after an up-tick in January. Demand and orders for telecommunications products and services have fallen sharply over the past 60 days. Some telecom firms report higher than desired inventories. Telecom firms say they are still looking for new products and services to stimulate demand. Semiconductor manufacturers say growth in orders has declined significantly and expect sales will get worse and probably decline over the next 30 days. Semiconductor price declines have accelerated, falling 5 percent over the past 30 days. Many semiconductor contacts say inventories are lean. However, firms who do not have their own production facilities, commonly referred to as "fabless," may be building inventories because they purchase with long-term contracts.
Slowing growth was reported in other industries as well. The national slowdown in the trucking industry has affected regional area transportation manufacturers, and some have announced layoffs. Sales of paper products have flattened, after sharp declines in the fourth quarter. Since this is not the normal seasonal pattern, paper producers expressed concern about the economy. Petrochemical producers are still operating at low levels of production although some facilities, which had been taken off line, are slowly coming back on line. Some high-cost producers had closed because operating costs were too high. Poor weather conditions and cutbacks in automobile manufacturing resulted in severe decreases in demand for clay and glass products. Other construction-related products, such as cement, concrete and lumber reported slight recoveries from fourth quarter's lows. Inventories of these products remain fairly high, but contacts expressed few concerns because they are anticipating a reasonably strong summer. Primary metals producers reported steady sales over the past few weeks. Demand for fabricated metal products tied to the energy sector continued to rise, with some contacts wondering how they were going to meet current demand. Refiners are enjoying good profit margins as the industry moves from production and distribution of heating oil to gasoline.
Services
Demand growth for business services softened since the last Beige Book. Temporary firms reported that business has generally softened, although not as much as nationally. Legal firms again reported slower growth and signs of a slowing economy; demand was strengthening for litigation and bankruptcy activity, while real estate, IPO, and transactional areas continued to decline. Transportation services have also experienced a modest decrease in demand. These firms continue to pass on high fuel costs to consumers.
Retail Sales
After weak unit sales in December, retailers said growth rebounded in January. While January sales were driven, in part, by discounting, most contacts said discounting was more severe in December, relative to the previous year. Sales growth cooled in February, to around 2 percent above last year for most contacts, which met expectations. Retailers believe sluggish sales are being caused mostly by weak consumer confidence, citing evidence that consumers have money to spend. They note good sales of big ticket items, no increase in bad debts and robust Valentine's Day spending, including healthy sales of singing gorillas. After declining in November and December, auto sales rose slightly in January and February, but dealers don't believe sales have hit bottom yet. Automobile inventories have been piling up for the past couple of months, and selling prices are falling despite higher input costs.
Financial Services
Contacts reported slowing loan demand, particularly at larger banks, which they attribute to slowing consumer confidence rather than economic sluggishness. Bankers reported no change in asset quality and said that there had been no recent changes in credit standards, although some said they were tighter than six months ago.
Construction and Real Estate
Overall construction and real estate activity picked up over the past six weeks after weakness in the fourth quarter of 2000. Home building picked up and continues to be the strongest segment of the industry, although the market has softened for homes that sell above $1 million. Nonresidential activity remained soft, and contacts expressed some concern. Some telecommunication firms have cancelled big plans for leasing in the Dallas market.
Energy
Activity remained at high levels over the past 6 weeks, with the U.S. rig count peaking around 1,200 working rigs. Revenues and orders are increasing as rigs and crews undertake more complicated and risky projects, but shortages of manpower and equipment continue to be a constraint on activity. International activity is rising but remains 20 percent below the levels of the last peak in 1998. Contacts expressed concern that there is a "paralysis in decision-making" at the biggest companies because they remain tied up in mergers and have made major cuts in personnel to impress Wall Street. This appears to be restraining increases in international drilling and deep-water activity in the Gulf of Mexico, despite spectacular recent finds.
Agriculture
Rain was welcomed throughout the District. Much of the wheat crop has been stunted by dry conditions, and farmers are optimistic that warm weather will stimulate crop growth. Cotton market conditions remained sluggish, with too much supply relative to demand, depressing prices. Energy, irrigation and fertilizer costs have increased substantially, leading to a serious cost-price squeeze for many producers. Cattle producers reported improved forage conditions, reducing the need for supplemental feeding in some areas. Producers say they may be able to stop liquidating their animals and increase domestic livestock numbers, which are below normal.
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Kansas City