April 14, 2010
Federal Reserve Districts
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Economic activity in the Eleventh District firmed up further over the past six weeks. Respondents in high-tech manufacturing, retail, residential real estate, energy and staffing and transportation services cited continued improvement in demand. Conditions in the commercial real estate, financial services and construction-related manufacturing sectors also showed signs of nearing bottom. Although respondents continued to express caution in their outlooks, overall expectations were slightly more optimistic than the last report.
Crude oil prices rose from $75 in mid-February to over $80 per barrel in late March. On-highway prices for diesel and gasoline followed suit, rising nearly 20 cents per gallon. Prices of chemicals and related products also rose sharply largely due to plant outages. In contrast, natural gas prices slipped from $5.50 per Mcf to near $4 during the reporting period due to continued high levels of production, low industrial demand and the end of the winter season.
Producers of trailers reported a large increase in orders over the past month, and added that they were building up inventories to better meet customers' needs. Manufacturers of emergency vehicles said growth in orders decelerated over the past six weeks as customers, particularly municipalities, are experiencing a decline in tax revenues. An aircraft components manufacturer reported an uptick in demand but said that orders remained significantly below year-ago levels.
Paper manufacturing firms cited flat to rising demand. Respondents say conditions have improved relative to last year, but the picture is far from rosy and expectations are for a slow and gradual recovery. Food producers said demand held steady over the past month, and noted a positive sales outlook for the year.
Respondents in high-tech manufacturing reported that orders continued to accelerate and the book-to-bill ratio was well above one. Contacts say inventories have increased slightly but still remain below desired levels. In an industry where prices typically fall, strong demand has helped stabilize prices. Most respondents are cautiously optimistic that demand will remain solid over the next three to six months.
Petrochemical producers report that ethylene plant outages have led to large increases in prices for ethylene and other related products such as polyethylene and polyvinyl chloride, which has dampened export demand for these products. Refinery margins remain very weak, and capacity utilization rates are below 80 percent.
Automobile sales rose over the past six weeks, which contacts attributed to improving consumer confidence. Inventories remain lean. Prices are flat but rebates recently introduced by Toyota, have led other automotive manufacturers to follow suit.
Reports from transportation service firms were generally positive. Strong overseas demand pushed up intermodal cargo volumes over the past month. Small parcel shipping firms said a pickup in demand from the professional and business services, manufacturing and nondurable retail sectors led to positive growth in volumes. Railroads reported a modest but broad-based increase in shipments, and noted that the outlook is more upbeat than last time. Airline demand appears to be slowly improving, with leisure travel seeing continued growth and business travel stabilizing. Contacts expect demand for air travel to be steady this year.
Construction and Real Estate
Apartment demand in most Texas markets was "meaningfully positive," according to contacts. New product was leasing well and there were fewer move-outs in older units, consistent with an improving job market. Lower rents were "doing their job" and generating positive demand. The exception was Houston, where overall leasing was weaker.
Reports from commercial real estate contacts were mixed, but overall they suggest the sector may be nearing bottom. Declining rental rates have spurred leasing activity in the office and industrial markets. One industrial contact noted that landlords have "taken a realistic look" at conditions and are offering drastic reduction in rental rates on renewals. Respondents noted that while absorption had improved, there would be no construction any time soon. Commercial property sales activity picked up from very low levels. Contacts said while the good deals being offered were minimal; there were many interested buyers and lenders. Outlooks for the commercial real estate sector were mixed, with some contacts expecting continued improvement and others anticipating a longer, rocky road ahead.