July 26, 2006
Federal Reserve Districts
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Eleventh District economic activity continued to expand at a strong pace from early June to mid-July, but there were some signs of cooling. Energy activity remained robust, and activity was still quite strong in the manufacturing and service sectors. Retail sales reports continued to weaken, with high gasoline costs squeezing other consumer spending. Nonresidential construction strengthened, and the level of new home and apartment building was unchanged, but there was a noticeable softening of demand for homes and apartments. Financial service firms reported favorable conditions, although there was some weakening of demand for consumer loans. Agricultural conditions remained dry.
Surging demand for gasoline and geopolitical tensions pushed oil prices to record levels in current dollars--rising briefly above $78 per barrel. Crude inventories are 11 percent above the 5-year average. Weak demand throughout most of the period pushed natural gas prices down to $5.60 per million Btu at Henry Hub. Natural gas in storage is 20 percent above normal and at the highest level in 8 years for this time of the year, but rising crude prices and the threat of tropical weather provide some support for prices.
Reports from construction-related manufacturers were mostly still strong. Some contacts noted recent softening which they attribute to weather disruptions and a decline in demand from builders. Primary metals producers said a rebound in nonresidential construction nearly offset cooling in the housing market. Producers of stone, clay and glass said demand mostly held steady at high levels. Lumber and fabricated metals manufacturing was unchanged.
Overall high-tech manufacturers say production continued to grow at a good pace since the last survey. Demand is strong for most devices, particularly cell phones, but weaker sales of PCs led to excess capacity and a build up of inventory for some chips. Sales of semiconductor manufacturing equipment have been lower than expected, with some orders being cancelled or delayed. Industry executives say this cooling demand will not necessarily lead to a downturn in the semiconductor cycle because PCs are a smaller percentage of the market than in previous years.
There was little change in the demand for chemicals, except for PVC, where demand has weakened with slowing housing construction nationwide. Refining utilization on the Gulf Coast pushed up to 95 percent, the highest levels since the hurricanes last year. However, utilization rates remain below normal for late June and early July. Mechanical problems are common, and refiners are delaying maintenance due to high cost, labor shortages, or inability to schedule needed work. Refiners also are earning strong margins of $15-$20 per barrel, making them reluctant to reduce runs.
The railroad industry continues to operate near full capacity and expects to set record volume levels this fall. Recent increases in traffic volumes were observed for coal, metals, petroleum products, grain and crushed stone for highway construction. Traffic volumes declined for products supplying home building, such as metallic ores, lumber and non-metallic minerals.
Trucking cargo volumes continue to rise, but contacts say the rate of growth is slightly slower than a year ago. Shipping firms say cargo volume has increased modestly over the past month. Demand was led by durables in wholesale, manufacturing, and retail areas. International traffic continued expanding strongly. The airline industry reports very strong demand and growing domestic capacity.
Auto sales have been soft, according to dealers, who say high gasoline prices are dampening sales of SUVs and other vehicles that obtain relatively poor gas mileage. Inventories and inventory costs are high at dealerships and factories.
Construction and Real Estate
Competition for commercial loans is intense, according to respondents, who say it is affecting pricing but not credit quality. One firm reports exceeding their latest monthly goal by a factor of three times and said there appears to be a lot of momentum for future growth. Rising interest rates have caused some clients to rethink deals but none have fallen through. One contact referred to activity as "scary good" because loan quality is better than expected but he fears lenders might be missing something important as they continue to aggressively compete for new loans.
As hurricane season approaches, a few rigs are leaving the Gulf of Mexico in search of higher rates or lower insurance premiums. Hurricanes are causing a general rethinking of drilling activity in the shallow waters of the Gulf of Mexico. Insurance costs have skyrocketed in the Gulf as a result of last year's hurricanes.
Range and pasture conditions are poor. Hay supplies remain short, and stock tanks are low. As a result, livestock producers continue to liquidate herds, and some have completely sold out. Good demand for dairy products and solid cattle prices are helping ranchers and dairy farmers.
Bankers expressed concern about the financial condition of producers because of drought, high fuel prices and rising borrowing costs.