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Eleventh District economic activity expanded in August, leading many contacts to express optimism about the outlook for the remainder of the year. Labor shortages continued to be reported, boosting wages in a few industries. Office rents and some energy and other product prices were higher. Demand grew at the same pace or increased for most manufacturers. Retail sales picked up, and demand continued to increase for services. Construction activity grew at a moderate pace, boosted by strong growth in commercial construction. Bankers said demand for financial services was unchanged. The energy industry continued to report strong demand and profits. Crop and livestock conditions were generally good.
Prices
Labor shortages continued to be reported and were boosting some wages, mostly at business service and energy firms. But several industries were fighting off wage increases by finding creative ways to increase worker satisfaction without raising wages or costs. Nearly all firms reported that the minimum wage increase was not binding. Office rents continued to rise, leading to a stratification in some markets�firms splitting their offices between high and low rent locations. Some manufacturers reported that problems with rail shipments had pushed up costs, but most were not passing on this higher cost to product prices. Logging restrictions had boosted some lumber prices, such as maple and southern yellow pine. Paper producers reported an increase in the prices of liner board, boxes and pulp, but no change in the prices of paper bags. One contact noted that memory chip prices had resumed falling recently after stabilizing some in the 30 days prior to the last survey.
Strong demand and tight supplies placed upward pressure on energy prices in August. Any disruption in normal delivery conditions, due to mechanical problems or weather, was immediately reflected in higher energy prices. Natural gas prices were pushed up by strong demand for current consumption and for storage to meet winter demand. Strong demand and tight supplies kept oil prices near $20 per barrel. Gasoline prices remained high--driven partly by a series of mechanical problems at large refineries and by a shortage of additives to produce clean-burning summer gasolines--but are expected to begin a seasonal decline soon. Ethylene capacity continued to be tight, but upward pressure on the selling price of ethylene and some other petrochemical products was restrained because large amounts of new capacity had come on line or is scheduled to come on line in the fourth quarter.
Manufacturing
Demand grew at the same pace or increased for most manufacturers. Demand was up for construction-related materials, such as metals and lumber, particularly to supply commercial builders and the mining sector. Strong demand and summer shutdowns had led to low inventories of steel. Telecommunications and electronics manufacturers said that demand growth had been steady since the last survey, and the outlook was positive. Semiconductor manufacturers said demand remained moderate but somewhat below trend. Producers of food and kindred products reported that sales were stable, although weaker than expected. Reports from apparel manufacturers were mixed, with some reporting increases in demand while others saying that demand had been very soft. Demand for petrochemicals remained strong. Domestic refiners responded to strong demand with high levels of production, reaching record high levels of capacity utilization for several weeks this summer. Each mechanical outage sent gasoline prices soaring, which sharply improved margins because crude prices remained stable.
Services
Demand continued to increase for business services, such as accounting, consulting, legal and temporary staffing services. Demand for these services was broad-based across industries, including demand from banking, manufacturing, small high-tech companies and information-technology consulting. Air cargo, trucking and railroad companies all reported very strong demand. The outlook was positive in all service industries, although there were some concerns about the availability of labor.
Retail Sales
Retail sales picked up and several contacts said that sales were stronger than expected. Retailers did not report any inventory problems. Some retailers said that their markdowns were not as large as at this time last year, raising final selling prices. Retailers were optimistic about the outlook for the remainder of the year and, as one retailer added, the outlook is "optimistic realistically so, not just wishfully so."
Financial Services
District bankers continued to report steady demand for financial services. Bankers said that competition remained stiff, keeping pressure on loan rates. Delinquency rates remained low, according to contacts.
Construction and Real Estate
Construction activity grew at a moderate pace in August, boosted by strong growth in commercial construction. Office occupancy rates continued to rise in major metro areas. Industrial vacancies are low but expected to rise as new construction is completed. Continued strong demand for apartments is expected to lead to increased apartment construction in the second half of the year. Existing home sales were up strongly in the past 6 weeks.
Energy
Oil service and machinery companies continued to report strong demand and profits. In August, the U.S. rig count exceeded 1,000 for the first time since the Persian Gulf War in 1991. Contacts expect Canadian drilling to reach record levels as well, further boosting demand for District services and machinery. Shortages of oil-related equipment and potential employees with industry experience have become a chronic problem, pushing up prices of equipment and labor. Contacts believe a shortage of crews will limit drilling activity.
Agriculture
Crop and livestock conditions were generally good. Harvest of the Texas corn crop is nearly complete, and reports indicate the crop is excellent. Texas is expected to harvest record high production of corn and peanuts, as well as large cotton and soybean crops. The cool, wet planting season combined with the summer's extreme heat has reduced this year's cotton yields, however.
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