June 11, 2008
Federal Reserve Districts
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Economic expansion in the Eleventh District continued to soften in late April and May, although activity in regions dominated by the energy industry remained robust. Businesses with national sales reported that economic growth in Texas is stronger than in the rest of the country.
Retail sales growth continued to be weak, and service sector activity softened. Manufacturing was mixed but improved some. Construction and real estate activity weakened further. Financial service firms reported that loan demand is growing faster than deposits. Agricultural activity improved.
Outside the energy industry, record high costs are weighing heavily on profits and leading firms to be less optimistic about the outlook for growth through the end of the year.
These developments are putting upward pressure on selling prices for many products, and some firms are struggling to raise selling prices, increase fees or reduce costs to survive. In the near term, retailers say competitive pressure will remain intense as weaker players go out of business and liquidate inventory. However, retailers say sizable input cost increases are projected and are expected to push up selling prices next year. Selling prices remained soft for most materials used in residential construction because demand is weak and inventories high.
Overall semiconductor sales have been flat over the past thirty days. Demand from Europe and Asia remained strong, but U.S. sales have been weak. Demand for solar technology is hot, but much of the production is occurring overseas. Semiconductor equipment producers say recent signs of stabilization suggest the worst of the downturn in this cycle may be over.
Sales of food products were unchanged, although higher prices have changed the mix of products and customers. Demand for transportation equipment remained strong, with good sales to supply the defense, aircraft and energy industries. Improved margins and an end to the maintenance season have led refiners to ramp up production and capacity utilization. Chemical production has also increased. Weak domestic demand has been partly offset by a surge in exports that has created a shipping logjam. Export demand is strongest for chemicals, such as ethylene, that are domestically produced with natural gas and have a cost advantage over oil-based production in other parts of the world.
Automobile sales weakened slightly and remained below year-ago levels. Inventories have increased for trucks and SUVs but are very low for fuel-efficient vehicles.
Legal activity continued to be strong, but the mix of work suggests slower economic activity. Real estate transactions declined, but there has been an increase in litigation and bankruptcy work. Oil and gas-related activity also remained brisk. The accounting industry reported moderate sales.
Rising fuel costs are straining the transportation industry. Intermodal shipping volumes continued at a level that is softer than earlier this year and a year ago. Exports have increased but not enough to offset the substantial decline in imports. Truckers say diesel prices have become too high to be fully covered by fuel surcharges and, in some instances, drivers have stopped their trucks or are leaving the industry. A few manufacturers said a shortage of truckers has caused delayed shipments and inventory buildup. The rate of contraction in small parcel cargo shipping is slowing. Demand is stronger for leisure air travel than for business. International travel is stronger than domestic. Air fares are rising, and some carriers have reduced capacity in anticipation of reduced travel.
Construction and Real Estate
Office demand slowed, except in areas dominated by the energy industry, such as Houston and Fort Worth. Industrial demand continued to weaken. Commercial construction levels are still high, but contacts say there are few new projects being initiated because it is difficult to obtain financing, particularly for large investments.
Deposit growth has been weaker than desired, and banks are turning to other sources of liquidity. Contacts reported some improvement in bank funding in recent weeks, with more access to a broader maturity range, but said conditions are not yet normal, and funding is expensive. Respondents indicated that there currently is sufficient liquidity to finance quality deals, but expressed some concern that this may not continue into the future.