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Over the past six weeks, Eleventh District economic activity grew at about the same pace as or a little slower than reported in the last Beige Book. Prices of most manufactured products were flat to down while service and construction-related industries continued to report upward price pressures. Manufacturers saw slightly slower sales growth, but retailers reported stronger than expected sales. Consumer borrowing increased with new home purchases, but wet weather slowed construction starts. Service industries reported growth was steady, but constrained by a shortage of labor. Energy activity remained strong but showed some hints of softening. Agricultural conditions remained favorable.
Prices
Goods-producing contacts reported more price declines than in the previous Beige Book, but some construction materials and service producers reported increases. A number of contacts reported commodity price decreases because of the Asian crisis, but some contacts indicated the decreases were not as large as previously anticipated. Excess capacity weakened prices for some manufactured goods.
Prices were lower for some petroleum products, memory chips, telecommunications products, and some metals. Crude oil and gasoline prices continued to decline and are lower than last year's levels. Although natural gas prices are higher than a year ago, they have fallen recently, and some contacts expect further declines. Respondents reported that excess domestic capacity for ethylene and propylene, increased imports of polyethylene bottle plastic from Asia, and increased domestic supplies of plastic resins like acrylonitrile, polyvinyl chloride and butadiene resulting from reduced exports to Asia have combined to reduce prices for many petrochemicals. Prices for telecommunications equipment continued a steady downward trend, but most respondents reported an accelerated decline in the price of memory chips as a result of the combined effects of overcapacity and the Asian crisis. Contacts also reported that increased imports from Asia lowered scrap metal prices by 2%, and have put downward price pressure on raw materials such as nickel and ferro-moly alloys.
Prices for retail goods, forest products, and heating oil were flat. Retailers reported that prices of goods imported from Asia did not decline as much as they had expected a few weeks ago, but some retailers expect further price declines in the third and fourth quarters. Apparel industry contacts reported that Asian apparel manufacturers and textile producers have not been able to move swiftly into the United States because they lack the reputations and distribution networks necessary to do so. Paper manufacturers reported limited effects from the Asian markets because Asian-produced paper includes more recycled content than does U.S.-made paper. Heating oil prices were unchanged but well below year-earlier levels.
Strong construction activity translated into a 5% increase in high-grade steel prices, a 2.5% increase in brick prices, and a slight increase in cement prices. As the weather improves, contacts expect cement prices to rise another 5% and soft lumber prices to increase 10% to 15%.
Service fees increased, but at a slower rate than service wages and salaries. Salaries for engineering and software design were up. Construction wages were also up, but contacts reported that tight margins for builders limited wage increases. Lumber producers reported 10% wage increases. Conversely, the rise in the minimum wage was binding for retailers and apparel manufacturers.
Manufacturing
The growth of sales for manufactured products was slightly weaker in the past six weeks, particularly in the telecommunications and petrochemicals industries. While sales of cellular telephones and Internet products continued to grow, a decline in sales of switching equipment left overall sales of telecommunications equipment flat. Domestic sales of petrochemicals were reported to be very strong, but sales to Asian markets were weak. Petrochemical producers said problems with rail shipping may have worsened. Contacts had difficulty shipping petrochemicals westward from the Gulf Coast, and said that several customers have temporarily shut down plants because petrochemicals were undelivered. Refiners reported that the demand for oil products was weak and inventories of crude and heating oil are large and growing. Prices for refined products have fallen as fast as crude prices, and contacts reported that margins have stagnated at levels that are considered mediocre to poor. Respondents indicated that they are responding to high inventories and low margins by extending and increasing the maintenance normally done in the turnaround season, when they switch the product mix. Sales of some construction-related products�such as cement and lumber�were slowed by the drop in construction that resulted from a wetter than usual February, and are expected to grow strongly with drier conditions. Most electronic equipment manufacturers said that sales continued to grow at the slower pace that was established over the past three or four months. One respondent reported that he had to seek out new suppliers because capital constraints had reduced the output of his Korean suppliers. Scrap metal and paper sales were steady at high levels, but scrap metal inventories were high due to rail shipping delays. Sales of brick and high grade metal increased over the last 30 days.
Services
Demand for business services, including temporary staffing, accounting, consulting and legal services, continued to increase, but all respondents reported difficulty meeting demand due to a dearth of workers from clerical to executive. Respondents also noted a decline in demand for accounting services in Houston as the result of oil price declines. Overall, respondents had a very positive outlook for business service conditions in 1998. Demand for transportation services continued at high levels, both for cargo shipments and passenger air traffic. Contacts reported that Union Pacific tie-ups have not improved.
Retail Sales
Retailers reported that sales growth was stronger than expected in February, with particularly strong growth at stores along the Texas-Mexico border. Contacts were optimistic about the outlook for sales in the coming year. Auto sales slowed in February after surging "phenomenally" in January.
Financial Services
Credit quality remained steady and competition for commercial loans remained strong with many customers receiving several loan offers. Contacts also reported increased consumer borrowing for home purchases, brisk refinancing activity and seasonally soft auto loan demand.
Construction and Real Estate
Real estate activity continued at a hectic pace, but construction was slowed by unusually wet weather. Respondents expect a surge in construction in the second quarter�possibly sufficient to create a shortage of skilled workers, project supervisors and estimators. Home sales were up strongly across the District, including areas which had been weak such as the Texas-Mexico border, and inventories were lean. New home prices rose at a faster rate, but builders' margins continued to be squeezed. Office rents "inched up" at the same rate, and industrial rents rose at a faster pace as office market demand spilled over into flex space. Land prices continued to rise sharply.
Energy
Energy activity remained strong in February, with some hints of softening. The outlook has weakened substantially since the last Beige Book. Crude oil inventories are large and growing, thanks to a very mild winter in the United States and Europe, reduced demand from Asia, and increased production from OPEC. Still, oil service and machinery companies continued to report very strong demand and very long lead times, and contacts said that they expect orders to remain strong for several months. Natural gas production remained flat compared to last year, with contacts expressing concern that companies may be having trouble bringing new capacity on line because of a shortage of oil field services. Nonetheless, there were some reports that it was becoming easier to schedule services and that some oil service price increases had been rescinded. There were also reports that some oil companies are paring back on their projected office space needs for 1998.
Agriculture
Agricultural conditions are reported as generally good across the District, with mild temperatures and good rains. Wet conditions temporarily halted land preparations and early planting activity. Livestock conditions remained good, but wet pastures caused problems in grazing and feeding.
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Kansas City