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There was a broad-based weakening of the Eleventh District economy in October and the first half of November. While there were a few exceptions, most businesses reported declines in production and/or new orders. Both manufacturing and staffing services noted a particularly sharp reduction in activity. Many contacts reported that they were being impacted by the weakness in the national economy and the crisis in the credit markets. Almost all respondents voiced concern about the near-term outlook with expectations of improvement ranging from about four to twelve months away.
Prices
There has been a broad-based easing of price pressures since the last survey. Many respondents reported that they resisted price cutting pressures from their customers but that they expected to lower prices over the next several months. Many respondents, particularly in durable goods manufacturing, said that they had not yet passed on cost increases from the beginning of the year and that even though costs had fallen in recent months, margins were still slim. Retailers reported that they had begun to offer discounts earlier than normal in anticipation of a weak holiday season.
In mid-November crude oil prices dropped below $50 per barrel from near $90 in early October. Oil product prices have fallen along with crude oil, as gasoline prices at the pump are down by about 40 percent and diesel is down by 30 percent. Natural gas prices have held steady at around $6.50 per thousand cubic feet although contacts said that if the winter is mild it is likely that prices will fall.
Labor Market
Many respondents reported that they were cutting hours and temp positions and that overall employment was flat to down. Job cuts were particularly pronounced in the manufacturing sector. Two out of three respondents in the paper industry said that they were cutting at least 10 percent of their workforce. Many respondents said that while conditions had weakened that they were trying to hold on to their skilled workers. Several companies had requested that their employees voluntarily reduce hours or take days off without pay. The main exception was accounting firms which continued to add staff but at a slower pace. Staffing services reported a significant decline in demand for temporary workers. Most industries reported little if any wage pressures.
Manufacturing
Most manufacturers reported declines in activity since the last survey and did not expect improvement until at least the first quarter of 2009. Most producers said that their inventories are lean and near desired levels.
Construction-related manufacturers reported falling activity due to continued low demand from residential builders and a drop off in demand from commercial construction. Producers of stone, clay and glass reported that demand fell sharply since the last survey. Primary and fabricated metal producers report that production has remained relatively flat but that new orders are down significantly. Many contacts expressed concern that commercial builders no longer have access to credit which will likely reduce demand for construction-related materials well into 2009.
Respondents in high-tech manufacturing report that orders have weakened since that last survey. Orders from businesses for high-tech machinery and equipment fell sharply. Demand for consumer products was moderately weaker with some low-end electronics seeing some strength. Contacts reported that they were surprised by the sudden weakness in demand from businesses in Asia although consumer demand appears to be holding up. Most respondents reported that inventories were near desired levels, although one respondent noted that they were above desired levels and that they will be paring them down over the next few months. Respondents expect demand from businesses to continue weak for six to twelve months and consumer demand to improve near the second quarter of 2009.
Paper manufacturers reported continued declines in demand, with corrugated boxes particularly weak. There were several industries that were exceptions to the recent decline in activity. Food processors reported that demand increased since the last survey. Demand for emergency services vehicles continues to be strong and aircraft parts contacts anticipate increased orders over the next several months.
Retail Sales
Overall retail sales softened since the last survey although respondents said that conditions remain better than most areas in the country. Discount stores are not slowing as much as department stores. Respondents report that the average dollars spent per customer is falling. This is consistent with reports that nondiscretionary items are driving sales and big ticket items like electronics and house wares have been hit especially hard. This trend is expected to continue through the holiday season and many respondents said they are cutting back capital expenditures for 2009.
Auto dealers report that sales and traffic have dropped further from the low levels six weeks ago. Most respondents think the market will continue to be very weak at least until mid-2009 and are keeping inventories at a bare minimum.
Services
Staffing firms report that they are seeing weakness across a wide range of industries. Contacts report that some positions have been eliminated and others are taking longer to fill. Demand is mostly for contract work and short-term assignments while orders for direct hires have dwindled. Sales at accounting service firms continues to grow at a moderate pace and contacts say they are cautiously optimistic about demand over the next few months. Demand for legal services has been steady to slightly weaker. Transactional demand is weak, particularly for banks and real estate firms, while litigation and bankruptcy activity remains strong. Legal firms report that receivables are slowing and getting more difficult to collect.
Airlines report that business demand has declined and future bookings suggest continued weakness over the next several months. Demand for barge services has slowed and contacts said they expect conditions to weaken further in the months ahead. Intermodal services and railroads reported decreased volumes. Railroads said that there were significant declines in shipments of construction-related materials, autos, pulp and paper, petroleum products and chemicals.
Construction
Housing market conditions worsened significantly over the past six weeks, according to contacts. Homebuilders said sales in October and early November were extremely weak and current traffic is nonexistent. There were reports of buyers walking away from their new homes, forfeiting their deposits. Respondents noted consumers' concerns about the financial and economic environment have them in survival mode; the last thing on their minds is buying a home. Builders continued to curb new construction.
Elevated foreclosures and large price incentives from some builders exerted downward pressure on prices. Home values have held up relatively well in Texas markets, and the recent dips remain modest compared to other parts of the country, say contacts. Respondents said apartment demand remains relatively solid and rental growth remains positive but slower.
Commercial real estate contacts said leasing activity and investment continue to be hampered by credit conditions. Businesses have abruptly halted leasing and expansion decisions, as they take a wait-and-see approach. The commercial investment market has ground to a halt with lenders unwilling or unable to lend and investors unwilling to take any risk. On a bright note, contacts noted businesses were acting orderly and pragmatically, just waiting for things to bottom out, and were not behaving in a panic mode.
Financial Services
Financial industry contacts report that fewer single-family and commercial real estate deals are getting done. Consumer lending is somewhat softer with credit card sales volume decreasing, and some deterioration in overall loan quality. Contacts foresee a weak, highly-uncertain economy and continue to evaluate potential borrowers with the same high level of scrutiny as reported in the last survey. Credit standards remain tight and banks are being extremely careful about double-checking the quality of every deal they make. While credit unions are also being extremely careful, they said that they have been slightly more aggressive. Downsizing in staff is occurring at a number of institutions, both as a result of mergers/acquisitions as well as the weak economy. While the cost of capital is still elevated, larger institutions reportedly feel less constrained after receiving TARP money and somewhat more comfortable supplying loans. At the same time, it's been harder for many lenders to widen loan interest-rate spreads further over the last six weeks. Several contacts, especially smaller banks, reported stiffer guidelines from regulators making it difficult to forge any new deals. While competition for new deposits is tough, institutions saw an increase in deposits due to a flight to quality from riskier investments.
Energy
Refiners have largely recovered from Hurricane Ike, and have operated in recent weeks at 87 percent capacity utilization, down about 2 percentage points from the same time last year. Oil services and machinery companies are beginning to see the leading edge of a downturn in drilling activity. The price of natural gas in mid-November was high enough to avoid major cuts in drilling. However, the price may be at risk due to ample winter inventories, higher-than-expected Canadian supplies, US production up 6 percent over the last 12 months, and recession-reduced industrial loads. Cuts in capital spending have been announced by a number of producers.
Agriculture
Growing conditions in much of the District remained generally favorable. However, contacts said the recent hurricanes caused over $1 billion in crop and livestock losses. There is a lot of fear among agricultural producers about the impact the ongoing financial crisis will have on the cost of credit and their ability to access it when they refinance agricultural loans for 2009. Crop and cattle prices have plummeted since the last survey.
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Kansas City