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Eleventh District economic growth continued to slow in September and October. Manufacturing and energy industry activity declined, while agricultural conditions remained very difficult. Retail sales growth was softer, but still "good." Construction activity also was slightly slower, but at very high levels. Contacts in the service sector continued to report good sales growth. Bankers said there had been a slight tightening of credit standards, and several industries reported difficulty obtaining credit. There was a marked loosening of the labor market for some industries, but labor market conditions remained tight for others.
Prices
Prices continued to decline for many products, and discussion of price increases was virtually nonexistent. Retailers said that selling prices were lower, and stores were making mark-downs earlier than last year. Prices have softened for energy-related products, and are particularly soft for rigs, supply boats and drill pipe. Natural gas prices moved under $2 per thousand cubic feet, and are expected to fall further before winter arrives because storage is now over 90 percent full. Retail gasoline prices hit the lowest level in six and a half years. Heating oil prices have fallen, and inventories are at the highest level since 1986. Prices for petrochemical products continued to fall, and producers say profits are "rock bottom." New capacity continues to come on-line for many petrochemical products, adding to the industry's problems. Selling prices for primary and fabricated metals are flat to down, with prices down 7 percent to 8 percent for some products. Contacts said that the price declines were due in part to an influx of foreign steel and other metals. Prices were lower for scrap metal and alloys. Cement prices are down 5 percent, and inventories are increasing.
Labor markets remained tight for some types of workers, but loosened markedly for others. In the energy industry, the skill shortages of nine months ago are a memory, as widespread layoffs have been announced involving 10-20 percent of the workforce of a number of companies.
Manufacturing
Manufacturing activity continued to decline. Sales were lower for cement, lumber and most wood products. Contacts said competition is stiff because lower priced lumber is being shipped to the Southwest form Canada and the Northwest. Lumber contacts say the oversupply is the worst they've ever seen in the industry, leading banks to call back some loans, thereby necessitating a search for asset-based lenders. Demand for some types of paper products continued to be strong, but sales of corrugated boxes slowed, and production was cut back. Producers of primary and fabricated metals reported a slight fall off in new orders, although a backlog of orders remains from earlier in the year. Metals producers expressed concern that they would be forced to reduce production when their backlog is worked off, probably early next year. Demand was softer for electrical components and telecommunications equipment. Semiconductor firms reported that the industry appears to have hit bottom, with sales flat for most types of chips, and slightly increasing for some types. Contacts reported that demand for personal computers continued to grow, boosted by sales of machines priced below $1000. Manufacturers of food products reported steady sales. Apparel producers said that there are signs that sales are picking up, after softness for some types of products over the past few weeks. Demand for gasoline was reported to be seasonally strong. Domestic demand for petrochemical products continued to be very strong, but had weakened in recent weeks. Producers say they are unable to export petrochemicals and are competing with cheap imports.
Services
Demand for transportation services, such as rail, air and trucking, continued to be strong. Temporary service firms reported a slight slowing in demand for their services from the manufacturing industry, although a lack of labor continues to limit their ability to fill orders. Telecommunications firms reported an increase in demand for wireless and data services.
Retail Sales
Retailers said sales growth has been slightly softer over the past few weeks. Contacts expect sales to remain "good," although most have become more cautious about the outlook than they were a few weeks ago, citing concerns about "a lot of negative news," and "consumers becoming more cautious." One retailing contact said it has become tougher to obtain financing for expansion of new or existing facilities. Stores in Houston and along the Mexican border said sales to Mexican Nationals had dropped off considerably. Auto sales were softer for all types of new and used cars, and even trucks.
Financial Services
Respondents were more cautious than in the last report, citing a perception that credit quality may begin to deteriorate, although there were no reports of increased delinquencies or charge off trends. Most contacts tightened credit standards, which reduced loan demand. Deposit demand was also lower because depository institutions reduced interest rates on deposits to follow the federal funds target rate.
Construction and Real Estate
Construction activity remained at very high levels, but slightly less than the breakneck growth seen in previous months. Housing starts continued to grow strongly, with current labor resources unable to meet demand in some markets. Sales growth slowed slightly for more expensive houses, but lower priced home builders reported no change in sales. Builders continued to report long waiting lists for new homes despite concerns that oil industry layoffs and weak consumer confidence would moderate the sales increases brought on by lower interest rates. Real estate contacts said financing of new office projects had been halted. However, the large amount of office space going up is expected to slightly erode occupancy rates (by about a point) next year in some markets.
Energy
Energy activity continued to decline. Oil-directed drilling is near all time low levels, with natural gas-directed drilling, offshore activity and international activity all declining slowly. Hurricanes and tropical storms moved through the Gulf of Mexico, forcing producers to temporarily abandon producing platforms and refineries, although damage was less than expected.
Agriculture
Agricultural conditions remain very difficult. Adverse weather, high costs, low yields and low prices have left many farmers and ranchers in dire financial shape. Contacts estimate that as many as 25 percent of the region's producers will discontinue production over the next year, particularly small to mid-size farms with no off-farm income source.
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Kansas City