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Eleventh District economic activity continued to decelerate in April and May. Manufacturing activity showed signs of stabilizing after deteriorating for most of 2001. Most retailers said the level of sales was flat or up slightly over the past six weeks. However, growth in the demand for business services continued to decelerate while construction and real estate markets continued to cool. Lending activity continued to slow while non-performing loans and delinquencies increased. Energy activity continues to accelerate. Agricultural conditions have been generally favorable.
In general, contacts in most industries are expecting activity to remain sluggish throughout the year. A few contacts believe activity may pick up some in the second half, others are focused on the fourth quarter and some are looking for a pick up in 2002. Several contacts mentioned a high degree of uncertainty, with the pace of economic activity being driven by consumer confidence (or lack thereof).
Prices
Stiff competition, excess capacity and high inventories are putting downward pressure on selling prices in several industries. Inventories of telecommunications products remain very high, and selling prices continue to fall. Auto dealers also report declining selling prices and say nearly all manufacturers are offering big incentives. Airlines have been offering major discounts on summer airfares. Airlines recently raised rates to cover rising labor and fuel prices, but the increase was quickly rescinded by all major airlines. Rising capacity has put downward pressure on petrochemical prices.
High fuel costs remain a concern for many firms. Crude oil prices held steady in May, despite a buildup in inventories, which are about 8 percent higher than a year ago. U.S. average retail gasoline prices have risen to over $1.70 in recent weeks. Gasoline inventories remain near the very low levels of last year, and inventories of reformulated gasoline are 9 percent lower than a year ago. With 36 types of fuel to stock in different regions, spot shortages in some regions of the country are expected. High natural gas prices are pressuring feedstock costs for products such as styrene, polyester, and benzene. Fuel surcharges have increased in the railroad industry. Natural gas prices have drifted downward steadily, as mild spring weather allowed for record levels of injections into storage fields, but inventories are 11 percent under the six-year average for this time of year.
Prices are rising for energy-related products and services, such as onshore and offshore rigs, supply boats, fabricated metals used in the energy industry, and all types of energy equipment. Selling prices have also been rising for lumber, and inventories are gradually dropping down to desired levels. Paper prices, which had been falling, now appear to be stabilizing.
Labor Markets
Labor markets have eased in many areas, although there continue to be pockets of tightness. For example, IT workers, who were in short supply several months ago, are now available, but engineers, welders and office workers are still difficult to find in some areas. Several contacts noted that employee turnover has slowed, helping reduce wage pressures. Still, rising labor costs remain a concern for most companies, particularly because of soaring costs for health care benefits.
Manufacturing
Overall manufacturing activity was uneven, with some areas of recovery while other areas continued to deteriorate. In general, however, industries that have been contracting do not expect to decline further. Improved weather led to a pickup in the output of construction-related products, such as lumber, brick, stone, cement and glass. Contacts are unsure if the pickup is an indicator that business is picking up or just a resumption of weather-delayed projects. Paper producers also reported an increase in sales. Some paper producers have had difficulty keeping up with the increase in demand because they slowed production earlier in the year.
Several manufacturers reported that sales remained unchanged or continued to deteriorate. Glass producers supplying the automotive industry report no change in demand. Demand for food products also remained unchanged over the past few weeks, but demand for apparel products was below that of a year ago. Demand for primary metals continued to soften over the past few weeks, and factories are not running at capacity. Contacts attribute slow sales to weakness in automotive, trucking, agriculture and commercial construction. Fabricated metals producers also report slower activity, except for products related to the energy industry.
Demand for telecommunications products appears to be stabilizing at extremely low levels, with the rate of decline slowing. Sales are about 25 percent below a year ago, and telecommunications firms continue to "ramp down" production. Sales of other high-tech products weakened over the past few weeks, across both consumer and business products. Most of the weakness continues to come from the U.S. market, but several respondents reported weakening sales in Europe. Excess capacity has increased and was reported to be very significant in semiconductors and telecommunications. Some respondents said that inventories were well managed, but others reported a buildup of parts and finished goods. There appears to be a general consensus among contacts that the industry is at or very close to the bottom with a turnaround likely to begin in the fourth quarter.
Petrochemical capacity continued to come back on line as natural gas prices drifted downward. Demand for petrochemicals is weak, however. U.S. feedstock prices make production noncompetitive in world markets because domestic producers use natural gas as a feedstock while most international producers use oil. High gasoline prices are generating excellent profits for refiners. Refineries are operating at very high levels of capacity utilization to take advantage of the very strong margins.
Services
Demand for business services remains soft. Contacts expect activity to remain sluggish throughout the year, but do not expect further deterioration. Temporary service firms say many of their customers have put hiring in a "holding pattern." Activity is slowest at manufacturing and high tech firms, while energy and banking firms are areas of strength. Demand for high-skilled labor is stronger than for lower-skilled labor, according to temp firms, who report an increase in the number of workers seeking employment, particularly professionals. Legal firms reported slower growth than a year ago, but contacts say activity is still quite good. Legal firms also report a slowing of fee collections from their customers, which they have not seen for a few years.
Transportation firms report continued sluggish demand. Airlines say demand from both leisure and business travelers has softened. Railroad activity has slowed due to flooding in the upper Midwest and fewer auto shipments, but shipments of coal and petroleum are up, and shipping of international containers is up slightly. Higher fuel prices have led truckers to lose short haul business to railroads because railroads use fuel four times more efficiently.
Retail Sales
Most retailers said the level of sales growth was flat or up slightly over the past six weeks. Inventories are generally in good shape. The industry is very competitive and contacts say that selling prices are at or below the levels of a year ago. Some costs were up, particularly for energy, transportation and medical. As a result, most contacts said that margins had narrowed. Auto sales are picking up slowly, but year-to-date figures are still below 2000. Auto inventories remain high, but dealers were less worried about the excess inventory because of the recent pickup in demand. Houston auto dealers reported very strong auto sales in April.
Financial Services
Lending activity continued to slow while non-performing loans and delinquencies increased. Most of the slowing was reported in large, urban banks, but the slowing is spreading to traditional banking type services, which is affecting smaller and independent banks. Commercial and consumer lending categories are the slowest. Interest rate decreases have spurred mortgage refinancings but have not dramatically stimulated other lending. Credit standards continued to tighten for some borrowers, and loan-to-deposit ratios have fallen significantly since late last year. Many contacts stopped lending late last year because of funding shortages. Now, many are flush with cash but are leery about making new loans. Most contacts are optimistic that the second half of the year will be better than the first half.
Construction and Real Estate
Construction and real estate markets continued to cool, except in Houston, where the energy industry is boosting activity. Residential markets have softened. Homebuyer traffic has slowed, and there has been an increase in cancelled sales, which contacts attribute to job losses and rumors of job losses. Despite the slowing, contacts reported strong demand at mid- to lower price points. The supply of commercial space continued to outstrip demand, as many tenants reduced their leased space. There has been an increase in subleasing, and rents have stopped rising.
Energy
The domestic rig count continues to climb, reaching 1262 rigs in May. Natural gas remains the focus of drilling, with 82 percent of drilling directed toward natural gas. Contacts report that as many as 10 rigs may be leaving the Gulf of Mexico to work other regions of the world. This is good news, they say, because the rigs came to the U.S. for lack of work overseas, and it indicates that major new international projects may be starting. The foreign rig count remains 12 percent below its last peak in 1997.
Agriculture
Conditions have been generally favorable for farming and livestock activities. Land preparation and planting progressed across the state with only minor weather delays. Insects caused increasing damage to crops and pastures, and some producers were electing not to fight the invasion as the cost of chemicals and fuel make it economically unfeasible.
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Kansas City