March 7, 2007
Federal Reserve Districts
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The Eleventh District economy continued to decelerate from early January to late February. Manufacturing and service sector activity grew more slowly. Retail sales picked up some. Nonresidential construction remained strong, but the housing market continued to weaken. Commercial lending remains solid, while consumer lending was still soft. Energy activity is robust, but contacts say the hectic pace has calmed. Agricultural conditions were mixed. Prices Prices fell for a number of products, including lumber and petrochemicals. Prices fell sharply--as much as 20 percent--for many plastics. Polypropylene and polyethylene prices stabilized and rose by a few cents in February, but PVC (40 percent of which goes to pipe used in construction) continued to fall. Prices for bottle resins also remained weak because of seasonal weakness and new capacity coming on-line. Semiconductor prices declined, and home prices drifted lower in most markets. Auto dealers reported larger incentives. Some prices were higher, such as for shipping. Legal fees are up. Office rents continue to rise according to contacts who also expressed concerns about higher utilities and taxes. Scrap steel prices have risen to an all-time high, boosted by strong global demand, and reduced import competition. Prices for other metals remain soft, however, and contacts expect price declines for copper and aluminum. Air carriers said expanding capacity is limiting fare increases. Labor Market There continue to be reports of shortages of skilled and semi-skilled workers, such as accountants, engineers and workers to support the energy, IT and nonresidential construction industries. Legal firms say hiring is increasingly competitive. The airline industry reports more difficulty finding and retaining qualified employees. Soft activity has improved the hiring picture for some professions. For example, auto dealers say the market for certified mechanics remains tight but not as bad as it has been over the past few years. Wages continue to rise for workers in short supply. Several firms noted that they are preparing for increases in the minimum wage, with less concern about the first year increase than absorbing additional increases. Several industries continue to report high health care costs. Manufacturing Overall sales in the high-tech industry remain good, but there are reports of slowing sales for some products. Contacts say the demand picture has been clouded by stiff competition and changes in the mix of products bought by consumers. While sales to consumers are still strong, demand has been flat for automotive and computer products and weak for high-end cell phones. Sales have picked up for products sold to defense and industrial customers. Some contacts note higher than desired inventories, but contacts say industry inventories are still in good shape.� Demand remains soft for construction-related materials, such as lumber, stone, brick, glass, plastics and metals. Inventories are up for some products, leading some firms to cut production, reduce hiring or lay off workers. Contacts attribute weakness to unfavorable weather conditions and the continued slowing in residential construction. Demand remains strong to supply materials to nonresidential projects, such as office, retail, schools and public works. Some metal producers report weaker sales for nonresidential projects because budget overruns have led builders to "value-engineer" and substitute cheaper products. Slowing housing construction has reduced demand for vinyl plastics and petrochemicals. Demand for auto-related products, such as tires, are holding at good levels. Some of the domestic slowdown has been offset by robust exports, which picked up late last year and remain very strong.� Gulf Coast refiners went into an extensive and extended maintenance season, with over a million barrels of capacity out of service on the Texas and Louisiana Gulf Coast in mid-January. Imports of gasoline have been relatively weak, and exports of diesel to Europe relatively high. Services Container trade activity remained strong, but cargo volumes were down for shipping firms moving domestic small parcels. Trucking firms reported less activity which they attribute to a temporary decline in imports from China. Demand for air travel increased some over the past six weeks.� Retail Sales Construction and Real Estate Home demand is still relatively strong in other major metropolitan areas, although activity is slower than a year ago. Despite relatively strong new home sales, contacts say large national builders are reducing speculative inventory and construction (especially of lower priced homes), partly to free capital to manage their balance sheets.� Demand for nonresidential space remains strong. There continues to be a lot of construction of new office space in Dallas/Fort Worth, and activity is expected to increase in other areas, such as Houston and Austin. Contacts note a lot of apartments and condominiums are still under construction.�� Financial Services Energy Domestic drilling remains at high levels but growth has been dampened by lower natural gas prices and higher costs, including rising wages and other costs. The U.S. rig count has been flat since August, and drilling for natural gas in Canada has recently dipped. Growth in the Texas rig count leveled off in late 2006, but drilling in the state increased in January and early February, boosted by the recent rebound in prices. Overall international drilling (primarily for oil) remains strong, and contacts say activity would be stronger with more available rigs, especially for offshore exploration. Additional offshore rigs are under construction and expected to be delivered this year and next, keeping activity strong for several years.� Agriculture
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