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Eleventh District economic activity decelerated in August. Manufacturing activity declined. Demand for business services continued to increase, although there were pockets of weakness. Construction activity remained at very high levels, but with signs of softening in some areas. Loan demand was still strong, but financing for large office projects had slowed. Energy activity continued to decline. Rain provided drought relief for farmers and ranchers but was little help for the serious financial stress confronting some producers. Across a wide range of industries, business sentiment regarding the future weakened considerably in recent weeks.
Weak international demand continued to add to growing supplies and falling prices for many commodities. Natural gas prices have trended downward in recent weeks, and contacts expect prices to fall further because inventories are "bulging." Crude oil is still in heavy supply. Wholesale gasoline prices have been unchanged, but retail prices have fallen. Pump prices for regular gasoline of 90 cents or less are not uncommon in a few local markets. Prices are declining for oil and gas services and equipment, and equipment is again available in all segments of the industry, after being in short supply a few months ago. Petrochemical prices continued to fall, although contacts expect prices to stabilize at current levels into next year. Prices stabilized for a few plastic products in the early summer, but are still falling for others. Prices were down for primary metals, paper, soft wood lumber and liner board. Semiconductor and personal computer prices have fallen faster than expected.
Prices were mixed for service firms, mostly because rising wages were offsetting lower input costs for some companies. Difficulty finding qualified workers led to increasing wages and fees for business service firms. Transportation firms said declining fuel costs have offset wage pressures, resulting in unchanged fees and prices. Some retailers reported an increase in the volume of goods imported from Asia. Imports prices are lower than a year ago for some contacts, although one retailer does not expect to see price declines on Asian imports until goods are received next Spring. Most retailers said they are passing lower input costs on to selling prices, while others are keeping selling prices stable because input price declines are offsetting higher wage costs. On average, the price picture has turned deflationary, and while wage pressures remain prevalent, ability to shift these pressures forward to consumers is absent in most industries.
Manufacturing activity declined, as many producers continued to adjust to weak international demand and stiff import competition. Demand softened for personal computers, some construction-related products and was still weak for most semiconductor and energy products. New orders for personal computers were down, and contacts said inventories are up because the industry overestimated sales growth, particularly for computers over $1000. Semiconductor orders remained weak and falling. Demand for cement was down, due to rain in parts of Texas and a drop in orders from oil service firms. Cement was no longer being allocated to customers, as it was a few weeks ago. Demand was up for lumber and wood products, mostly for commercial building, but contacts noted some weakening in demand for products used in the early phases of residential building. Demand for primary metals has declined, stemming from weak international orders. Fabricated metals firms said construction-related demand was still strong, although sales were weak to high-tech firms. Brick sales were up, but contacts expressed uncertainty about the long term outlook. Demand for corrugated boxes was still strong, but sales of liner board and other commodity paper were down because of weak international demand and strong import competition. Domestic demand for petrochemicals and plastics continued to be strong but "an inability to export" resulted in declining operating rates. Summer gasoline demand was "good," but less than some had expected. Refineries have operated at unusually high levels of production and kept inventories full.
Demand for business services continued to increase, but with some pockets of weakness, particularly serving customers in the oil and gas industry and, to a lesser extent, in consolidating industries such as banking and high-tech. Transportation firms, such as passenger airline, trucking and rail, reported an increase in activity. Service contacts were optimistic about the outlook, but some expressed concern about stock market declines impacting future business activity.
Retailers reported continued "good" sales growth, at roughly the same rate reported six weeks ago. Contacts remain optimistic about the sales outlook. As one said, "customers will have to change their behavior" before the retailers change their outlook. Auto sales rebounded some from softness in early August, but dealers expressed concern about the stock market affecting future sales.
Loan demand remained strong overall, and bankers reported no change in credit quality. Home equity lending was still strong, but contacts said auto and personal lending was slowing, partly because customers were consolidating loans to gain a tax deduction. Financing for larger office projects slowed, particularly within the last week, which contacts attributed to "the stock market slump" and "dramatic flattening of the yield curve."
Construction and Real Estate
Construction activity continued at very high levels, but there are signs of softening in some areas of the real estate market. New home sales moderated from an "unsustainable growth rate" to a strong pace. Contacts said developers are pausing to reconsider planned office projects because office prices have stabilized and there has been a decline in preleasing of buildings currently under construction. Increased apartment construction led to slightly lower occupancy rates in some locations, and further weakening is expected. Hotel occupancies also weakened in some areas but remained very strong in others. Industrial market activity was still strong, although some contacts expressed concerns about overbuilding. Contacts fear companies may slow future travel and capital spending, which could weaken hotel occupancy rates and absorption of commercial space.
Drilling continued to decline. Gas-directed drilling in the United States is shrinking and oil-directed drilling is headed toward all-time lows. The U.S. rig count, at roughly 790 rigs, is down 22 percent from last December's peak. Texas drilling, which peaked last November, has now fallen by a third. Demand for oil and gas machinery and services continues to decline along with the rig count. The decline was limited to domestic drilling on land for much of this year, but offshore and international drilling are now contributing to the drop in demand. Contacts report that, while layoffs have been relatively limited so far, significant layoffs are expected.
Rain provided some drought relief for crops and livestock, but it slowed harvesting and caused isolated flooding. Crop yields and quality are significantly below last year. Contacts reported that the combination of low yields and low prices has led to serious financial stress for many District crop producers and will encourage marginal farmers to discontinue production.