June 14, 2006
Federal Reserve Districts
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Eleventh District economic activity continued to expand quite strongly from mid-April to early June. Energy activity is still very robust, and both the manufacturing and service sectors report continued strong activity. Construction and real estate activity remained brisk, but there was a noticeable dip in the market for lower priced homes, particularly in Dallas and Fort Worth. Retail sales growth weakened slightly. Financial service contacts continue to report favorable conditions. Spring rains have improved agricultural conditions, but parts of the District remain very dry, and drought has damaged some production. Rising costs pushed up selling prices for many industries.
Prices are higher for most construction-related manufactured products, but prices fell for a few products used in homebuilding. Builders say rising construction costs are a growing concern because stiff competition is making it difficult to increase prices.
Crude oil prices hovered around $70 per barrel during the period boosted by concerns that political tension and terrorism could lead to supply disruptions. The recovery of refinery capacity along the Gulf Coast helped push oil demand back up to normal ranges, but consumption remains on the low side of the 5-year average, and inventories of crude are well above historical levels.
Gasoline prices in the District increased at the pump throughout most of the period, rising to near $3 per gallon in mid-May. Inventories of reformulated gas fell to very low levels as the industry changed to ethanol-based oxygenates. The change appears to be nearly complete, but ethanol is in short supply and a series of refinery outages has kept markets nervous.
Mild weather reduced demand for natural gas, and inventories increased to 55 percent above normal for this time of year. Prices fell from $8 to $6 per million Btu at Henry Hub. Prices would have fallen further if not for rising crude prices and the coming hurricane season.
Prices are higher for most chemicals. After falling through March and April, major plant outages pushed up ethylene prices in May. Higher ethylene prices, low inventories and a boost in demand pushed up polyethylene prices. Propylene, which can be used the production of gasoline, rose along with prices at the pump. Polypropylene prices were also up. Polyvinyl chloride prices were lower, which contacts attributed to weaker sales to homebuilders.
The paper industry reported stronger demand for products, particularly to supply schools and hospitals. Sales of food and apparel products were unchanged. The high-tech industry reported continued good growth. Semiconductor producers said demand was up, and one firm reports that their bookings are stronger than revenue. Most respondents said inventories are at desired levels, and prices are firming.
Refinery capacity utilization along the Gulf Coast returned to 90 percent for the first time since the hurricanes, primarily due to the return of three large refineries (two in New Orleans and one in Houston). The return from spring maintenance continued to be slower than expected. The chemical industry also continues to recover from the hurricanes. Contacts say demand for plastics is probably being helped by some precautionary inventory building before the hurricane season.
Construction and Real Estate
Demand for apartments remains strong, and occupancies are increasing in most markets, but rents are not firming as expected. A notable exception is in Houston where hurricane evacuees continue to stimulate the market, particularly for Class B and C properties. There is growing concern about overbuilding of condominiums and town homes in Dallas, and contacts fear that it will end badly. Demand for office space continues to edge up at a steady pace, with rents firming. Contacts say retail markets remain healthy. Demand for industrial properties is gradually improving.
Recent weakness in natural gas prices has not curtailed exploration according to contacts. Some drilling for natural gas could become unprofitable if current prices persist or weaken further, but the futures market shows stronger prices by late fall. The current surplus of natural gas in storage could disappear quickly with a hot summer or a hurricane-related disruption of supply.
The industry's expansion is still being constrained, mostly by shortages of labor. Strong demand and rising prices for inputs, including commodities and labor, are pushing up prices of oilfield services.