April 13, 2011
Federal Reserve Districts
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The Eleventh District economy grew at a moderate pace over the past six weeks. Energy activity remained strong, refining activity picked up, and demand was strong for most petrochemical products. Reports from the manufacturing and non-financial service sectors were mostly positive. Financial services firms noted a slight improvement in loan demand. Conditions continued improving in the commercial real estate leasing market, and apartment demand was strong. The single-family housing sector remained weak however, and widening drought conditions were reported in the agricultural sector. Many responding firms across a wide variety of industries noted uncertainty about events in Japan and the Middle East, and some voiced concerns about shortages of parts in the near-term. Since the last report, price pressures increased, and there were more reports of hiring activity.
The price of crude oil rose from $85 per barrel in mid-February to over $100 per barrel in late March. Natural gas prices receded early in the reporting period as cold weather subsided, but strengthened again to over $4 per Mcf at the end of March, due to geopolitical uncertainties and rising crude oil prices. Prices for most petrochemical products increased since the last report, according to respondents.
High-tech manufacturing firms said the fallout from the ongoing natural disaster in Japan was the major factor impacting the industry since the last report. Contacts that ship a significant share of output to Japanese factories noted their profits will be negatively impacted, particularly in the first and second quarters of this year. One respondent estimated that shipments coming from at least one factory in Japan may not return to normal until September. Other than events in Japan, most firms said that conditions were stable.
Paper manufacturers said demand had mostly recovered from the slump due to bad weather in January and February. Most firms said demand was stable or improved. Expectations are mostly for stable to improved demand over the next several months, although the longer-term outlook is more uncertain. Manufacturers of transportation equipment said demand was unchanged from the previous report. Outlooks remain cautiously optimistic, although some contacts noted concern about rising fuel costs and global uncertainties. Food manufacturers said orders rose at a moderate pace, and the outlook for sales was positive.
Eleventh District petrochemical producers said domestic demand remained strong for plastics such as polyethylene and polypropylene. Still, higher U.S. prices for some petrochemicals have made exports less attractive. The major exception is PVC which is used in construction, as ample supplies and competitive prices due to low domestic demand have kept exports solid. Refiners said activity had picked up since the last report, with stronger demand for gasoline and oil products. Refinery margins rose despite the increase in crude prices.
Automobile sales continued to improve; however, respondents note concern over potential supply chain disruptions due to the ongoing natural disaster and nuclear calamities in Japan. Aside from these concerns, automobile dealers reported a favorable outlook for the balance of 2011 due to strong foot traffic consisting of high-quality customers.
Demand for accounting services increased since the last report, as is typical for this time of year. One large firm noted that activity picked up noticeably for transactional business and mergers and acquisitions services. Continued improvement in business has reduced the pressure to keep fees low. Legal contacts noted mostly steady demand, with some strength in corporate services.
Reports from transportation services contacts were mixed, but mostly positive. Intermodal transportation firms noted cargo volumes declined due to weaker demand from international clients. Railroad shipments increased moderately, with particularly strong volume growth in ores, motor vehicles, petroleum products and industrial construction materials. Container trade volumes flattened over the reporting period. Airlines reported continued steady traffic, although contacts noted that fare increases stemming from higher fuel costs could slow bookings. Most transportation services respondents were optimistic in their outlooks and expect growth in demand this year.
Construction and Real Estate
Apartment demand accelerated since the last survey, and contacts said occupancy rates were improving and rental rates were rising. While construction activity is picking up, demand continues to outpace supply suggesting conditions will continue to improve in the near-term.
Office and industrial leasing activity picked up slightly since the last report. With construction of office buildings and warehouses at very low levels, contacts say the modest acceleration in demand for space is likely to have a positive impact on vacancy rates this year. Sales of commercial property remained at low levels, although contacts noted a small uptick in sales of foreclosures and distressed properties.