The Eleventh District economy weakened further in January and the first half of February. Falling demand was reported across a broad range of industries, with manufacturers and energy respondents noting the largest declines. Outlooks remain pessimistic, and many contacts expect little improvement through year-end.
Contacts in most industries said selling prices were down. One major exception was the retail sector where prices were recently holding steady following the winter clearance season. Respondents in the oil services industry said prices were falling rapidly. Within manufacturing there were scattered reports of "as-needed" orders, as customers were wary of holding inventory that was declining in value. Petrochemical prices experienced significant price declines in January and February as demand and energy feedstock prices fell. Fabricated metals producers said prices are "falling like a rock." Across industries, input costs had come down and lower commodity prices appeared to be flowing through to longer term supply contracts. Fuel surcharges continue to be reduced but have not completely disappeared.
From January through mid February, the price of West Texas Intermediate crude oil fluctuated between $48 and $34 per barrel. An inventory improvement put the price near $40 as the survey period ended in the third week of February. While retail diesel prices fell by about 11 cents per gallon, gasoline prices are up about 25 cents since early this year as demand has strengthened to year-ago levels. Natural gas prices fell to a six-year low of near $4.00.
Labor markets remained weak, and payroll reductions were prevalent across industries, with the most significant layoffs noted for manufacturers and energy services firms. Several respondents were trying to avoid cutting staff by trimming hours and salaries instead. There were some reports that firms were considering pay freezes for top management. Staffing firms noted pressure from clients to lower pay rates.
Most manufacturers reported declines in orders and production since the last survey, and outlooks remain pessimistic.
Producers of construction-related manufacturing products said orders continued to fall over the past six weeks. More than one respondent expressed concern about whether their firm would make it through the current downturn, and several noted competitors or customers had gone out of business or filed for Chapter 11. Bookings for residential building materials were down sharply and contacts reported layoffs and plant closings. Metals producers that supply to the nonresidential construction sector said orders were unexpectedly low as commercial activity weakened, the only exception being demand tied to institutional/public works construction. Outlooks were grim among construction-related respondents, with most not expecting any improvement this year.
Eleventh District respondents in high-tech manufacturing reported continued declines in production and orders. Reductions in demand were widespread across most products and areas of the world. Layoffs and temporary plant shutdowns have increased since the last survey. Most contacts said they were aggressively cutting inventories to very lean levels. One semiconductor respondent expects demand to fall through the first quarter as industries that use semiconductors in production reduce inventories. While most contacts noted the outlook remains particularly uncertain, most expect some improvement by year-end.
Demand for paper products was mixed. After falling late last year, orders of corrugated boxes held mostly steady over the past six weeks, although demand is below year-ago levels. Manufacturers of printing paper said demand softened further during the survey period, after accounting for a normal seasonal slowdown. Inventories were reportedly bloated, and some contacts were reducing payrolls.
Weak orders for autos and aircraft continue to hamper the transportation manufacturing sector, yet sales of some specialized products rose. Contacts in the food processing industry said sales growth of food products has flattened out, but contacts are satisfied with current levels and expect growth to remain steady in coming months. Most respondents noted stable prices.
Refiners' margins slowly improved from very low levels in December. Contacts said the last couple of weeks have been quite good, although operating rates were relatively weak and fell through the survey period. Although petrochemical prices continue to fall significantly, demand improved slightly in January as customers who had worked down their inventories began to re-order. Still, contacts said orders were on an "as-needed" basis only. February has not shown signs of continued demand improvement.
Retail activity picked up slightly since the last survey. Contacts were mixed in their explanations for the uptick, but most suggested that discounts and clearance prices in January lured consumers. Consumer discretionary spending remained weak overall, but there were some reports of gains in department store revenues and home products sales. Contacts said Texas sales were just slightly outperforming the national average.
Auto sales held steady at low levels in recent weeks and contacts are hopeful this signals the bottom. With many incentives already in place prices are not expected to go any lower. Respondents expect the next 15 months to be tough and expect several franchise dealers to go out of business in 2009.
Staffing firms said business was worse than anticipated with orders down sharply for both direct placements and contract work. Demand was dismal for workers across a broad range of occupations, the only notable exceptions being sales professionals and workers trained in mortgage refinancing or collections. Pricing remains competitive and some firms let go of market share to maintain margins. Accounting firms reported steady demand--mostly concentrated in tax and audit-related services. Legal activity weakened since the last survey. The majority of business continues to be concentrated in litigation and bankruptcy, while corporate, real estate, and transactional demand remain weak. Bankruptcy-related business has increased, but not to the levels legal contacts had expected. The general outlook among service contacts was more pessimistic than reported in the last survey.
Eleventh District-based airlines report demand continues to fall and fares are following suit. International passenger traffic is down substantially. Most airlines were re-assessing business strategies. Respondents in intermodal transportation said cargo volume continued to fall since the last survey, a result of the decline in demand for imports and the decrease in exports. Large parcel express air and ground cargos continued to be negatively impacted by poor U.S. retail sales. On a brighter note, railroad shipments rebounded slightly in recent weeks, although contacts still expect a difficult year ahead.
Most Eleventh District financial institutions characterized loan demand as "disappointing." Several respondents said that while capital is more readily available for lending, loan demand has fallen and borrowers that are coming forward are less credit worthy or unwilling to meet more stringent terms. Lenders continued to set interest rate floors on the prime rate or price off LIBOR on some loans. Commercial real estate lending has "dropped off a cliff" over the past few months, and large loans that are maturing cannot get renewed with the same financial terms. Contacts said the "hyper-focus" on the value of commercial properties is creating underwriting problems for even healthy institutions. Lenders said overall credit standards remain tight and noted somewhat tighter scrutiny for consumer loans recently. Deposits were stable.
Construction and Real Estate
Housing conditions in the Eleventh District remain weak, but there were scattered signs of improvement since the last survey. After a "horrible" fourth quarter wrought with cancellations and a lack of sales, homebuilders reported buyer traffic picked up in January and has been sustained in February. Low interest rates are helping pull potential buyers off the sidelines say contacts. New home sales picked up since the last survey, although they are "nowhere near" the level seen in prior years. Several contacts noted that despite encouraging signs, several smaller builders are expected to exit the market in the coming months. Margins are squeezed, cash flow is extremely tight, and financing is difficult--even for legitimate contracts. Existing home sales continued to decline and median prices edged lower, although contacts say the level of inventory is low and should continue to keep price declines minimal compared with the national average. Several respondents expressed hope that the housing stimulus package would give the market more time to heal, but some noted parts of the plan were not enough to spur sales.
Commercial real estate transactions remain minimal, yet some contacts noted that "price rediscovery" of real estate assets was starting to happen. Still, most contacts said uncertainty about the size of the write-downs was keeping lenders and sellers on the sidelines. Office leasing activity remained slow but "ok," according to contacts. The outlook for commercial real estate remains uncertain given that many loans are coming due amid the difficult financing environment. Contacts expect nonresidential construction to decline in 2009.
Demand for oil services and equipment is shrinking rapidly as the U.S. rig count follows energy prices down. The domestic rig count has lost an unprecedented 697 rigs since the September peak and 382 since year-end. Texas accounted for 57 percent of the decline this year. Initially, domestic drilling cuts were concentrated in conventional, vertical drilling, but more recently the decline is spreading to horizontal, unconventional natural gas drilling. Respondents said demand for some durable equipment, such as pumps, drill pipe and bits, is down by 90 percent or more--as these parts can be cannibalized from rigs taken out of service.
The dry spell continues to grip much of the District. Wheat and oat crops are suffering from lack of moisture. Grazing conditions are poor as well, and most ranchers reported the supplemental feeding of livestock. Hay stocks are low and feed costs remain high, forcing some ranchers to cull their herds. District dairy producers report weak conditions. A stronger dollar and weak export demand led to declines in milk prices.