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In March and early April, Eleventh District economic activity grew at a slightly slower pace than in January and February. Most contacts remained optimistic about the outlook for economic growth, although some expressed increased caution about their forecast over the next few months. Demand continued to increase for business service firms, and retailers reported good sales. Financial service contacts reported stable loan demand. Construction activity continued to strengthen, boosted by strong commercial and home building and "hectic" real estate activity. Manufacturing activity grew at a slower pace than reported in the last beige book, mostly due to weaker sales to Asia. Energy activity was softer, with a strong shift away from oil-directed drilling. Agricultural producers continued to report favorable conditions.
Prices
Price changes were mixed over the last six weeks, with lower prices for most energy products, electronics, chemicals and aluminum but higher prices for some construction-related products, real estate and most services. Business service firms said fees were up "across-the-board." Land prices continued to increase, up 15 percent over last year's level in some markets. Office rents were rising, although at a slower rate. Prices for telecommunications equipment were down, and prices for memory chips were "falling like a rock." Prices were lower for oil, heating oil and gasoline, but remained firm for natural gas. Reduced demand from Asia and falling oil prices are both pulling down prices for a number of chemicals products.
Labor markets remained tight in many industries and for many types of workers, although wage increases remained mostly limited to the service sector. More employers are using training programs, so they can hire workers who previously were considered unqualified to meet their labor needs. Contacts in the service sector said a lack of workers has limited businesses' ability to meet increasing demand.
Manufacturing
Manufacturing activity grew at a slower pace than reported in the last beige book. Demand for apparel, food, paper products, and construction-related materials continued to increase, but demand for some electronics, chemicals and refining was lower. Demand for cement was so strong over the winter that the industry began allotting distributions at the beginning of April and expects to continue throughout the summer. Activity continued to be brisk for some electronics and telecommunications firms, although Asian demand for most semiconductors and for products that contain semiconductors has led to excess inventories for some products. While unit sales continued to increase for U.S. consumption, falling prices led to a drop in revenues for some producers, depending on the magnitude of their Asian sales. Asian demand for chemicals has declined sharply and the prevailing price levels in Asia are unattractive to American producers. Chemical producers reported that, even if a deal can be struck, trade financing is difficult. Domestic demand for chemicals has remained extremely strong, but has not been enough to prevent a deterioration in prices for a wide range of products. A warm winter built up large inventories at refineries, and profits were reported to be very weak, down 20 percent to 30 percent compared to last year at this time. However, refiners have shifted focus to the gasoline market, and a potentially strong summer driving season has boosted prices and stabilized margins.
Services
Demand continued to increase for business service firms, such as temporary staffing, accounting, consulting and legal. Despite healthy demand, however, several contacts reported some hesitancy about future business conditions. Their outlook remained optimistic, but respondents were more conservative in their planning than they had been in recent months. Air freight, trucking and rail firms reported an increase in cargo volume. Contacts said there are signs that the rail congestion is starting to ease.
Retail Sales
Sales continued to be good and stronger than expected for a number of retailers. Selling prices were mostly unchanged, with little change in costs. Some contacts reported lower prices for goods coming from Asia. Contacts are optimistic that sales growth will remain good, partly boosted by further reductions in prices for goods coming from Asia in the third and fourth quarters. Auto sales continued to increase in March.
Financial Services
Loan demand was unchanged, with no reports of declining credit quality over the last six weeks, although contacts believe standards are below this time last year. Respondents were upbeat about current conditions, expecting no major changes in profits or loan demand in the near future. Several respondents said that they do not expect much change in their business as a result of the recently announced merger of Bank of America and NationsBank.
Construction and Real Estate
Construction activity continued to strengthen in March and early April, boosted by strong commercial and home building and "hectic" real estate activity. Absorption of office space remained strong and occupancy rates were rising, although contacts expect occupancy rates to stabilize when new construction comes on line over the next year. Despite substantial new construction, apartment occupancy rates have been holding steady, but are expected to decline slightly as new multifamily construction is completed. Some contacts expressed concern about multifamily overbuilding, particularly in Dallas.
Energy
Service companies are reporting a softer market for drilling activity and a strong shift away from oil-directed drilling. U.S. crude inventories are 6.3 percent higher than this time last year and are still rising. Producers are reported to be shutting in some oil wells. Natural gas drilling remains very good however, and contacts say the industry is still very healthy, just less frantic than late last year. Several large oil producers have announced cuts in their capital budgets for the coming year. Still, pricing for energy services remains "good," order books are still "strong," and several contacts say they're looking to hire good machinists.
Agriculture
Dry, sunny weather allowed field activities to move ahead in most areas. There were reports of drying topsoil, and producers say it's time for the rains to start. Livestock conditions remained good. Ranges and pastures continued to "green up" despite dry conditions.
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Kansas City