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Economic growth in the Eleventh District continued to gradually cool in November. Overall manufacturing activity was weaker, and drilling activity continued to plummet. Demand for business services was somewhat softer, with the exception of temporary service firms which reported a pick up. Retailers said sales activity has been weaker than expected. Sales were strong or increasing for some manufactured products, and construction activity remained at very high levels. Financial service contacts reported tighter credit standards and strong deposit growth. Harvest is winding down for most crops, but the financial situation remains poor for many agricultural producers.
Prices
There continued to be numerous reports of price declines, particularly for manufactured and energy products. Although there were scattered reports of rising prices from some real estate and service contacts, these reports were less widespread than have been reported for several years. Import competition and falling input prices led to further price declines for most metals and all types of paper. Lumber prices fell 10 to 15 percent over the past six weeks, and contacts say their customers and distributors have reduced inventory in anticipation of further price declines. Crude oil prices dropped below $12 per barrel, the lowest nominal level in 12 years. Gasoline and heating oil prices are low, and inventories are high. Natural gas prices were up sharply in early November, but have since declined. Weak natural gas prices are expected unless a cold weather materializes, because storage is 10 percent higher than last year and nearly 100 percent of capacity. Petrochemical and plastic prices have stabilized at low levels. Inventories are down for some petrochemical products, such as ethylene, because of numerous maintenance outages and hurricane-related shut downs. Prices continued to fall for personal computers and telecommunications products, although contacts said prices were not falling as fast as "usual" because costs are not dropping significantly. Cement prices continued to increase, but contacts say there is more resistance to price increases, and prices are expected to soften next year.
Some labor markets remain tight, and wages in those industries are rising, particularly for highly technical positions, business services and the retail industry. Retail contacts say workers are "not what you want when you find them." Temporary service firms are still having trouble finding enough workers to fill customer requests. Some high tech contacts say the industry has turned its focus to retaining workers rather than hiring. Telecommunications firms said wages are competitive because of the lack of technical/skilled workers, but pressures are not as intense as they were 3 months ago, partly because firms are focusing more on expanding capital rather than labor.
Manufacturing
Manufacturing activity continued to weaken. Demand was strong for most construction-related products and some high-tech products, but energy-related manufacturing continued to decline. Import competition remains intense for some industries, with plant or line shutdowns expected in lumber and paper. Lumber remains in oversupply despite strong demand from the construction industry. Domestic demand for paper products is also strong, but global demand remains weak, and inventories are up. Globally, plant shut downs are expected to reduce worldwide excess paper capacity by 50 percent or more. Cement producers say the softening reported in the last beige book appears to be solely due to poor weather, and activity has returned to high levels. Brick demand was strong, and gypsum wallboard sales have been so strong that customers are on allocation for this product. Demand for metals was "fairly strong" but less than expected for some products. Metals producers are receiving new orders from the construction industry but expect these to slow. Demand for telecommunications products continued to grow, although contacts said competition has become more intense, and additional mergers are expected. Personal computer sales increased. Demand was up slightly for semiconductors, and contacts say inventories have stabilized, but they are cautious that a weakening domestic economy could halt the recovery. Demand remains weak for downstream energy manufacturers, although producers benefitted from the drop in oil prices in November. Refiners say demand for gasoline and heating oil has been weaker than they hoped, and producers anxiously await cold weather. Low export volume has left the chemical industry with oversupply. Contacts believe the industry has bottomed out, albeit at a very low level.
Services
Demand for business services was softer, with the exception of temporary service firms who said demand was up over the past month. Legal firms reported slower mergers and acquisition activity, but stronger corporate bankruptcies and restructuring activity. Demand for consulting and accounting services was softer, due to the slow down in commercial real estate activity and the end of year 2000 activities for many companies. Transportation firms reported strong demand for retail shipments and air passenger traffic, but weak shipments of chemicals and oil, especially agricultural chemicals.
Retail Sales
Retailers said sales were softer than expected in November, although most contacts thought sales remained "good." Some expressed concern that the consumer may be pulling back, while others are optimistic that "a good cold snap" will spur sales. Thanksgiving sales were mixed, and most retailers agree that Christmas has started slowly. Heavy homebuilding has boosted furniture sales, however, with stores reporting double-digit gains over last year. Sales to Mexican nationals continued to be below expectations. Auto sales picked up, which contacts attribute to increased dealer rebates.
Financial Services
The financial service industry reported continued strong deposit growth, with a few seasonal dips in delinquency rates and loan demand. Most banks reduced their prime and deposit rates, and tightened credit standards. Contacts said that much of the financing for large commercial projects, that disappeared in September, has returned to the markets.
Construction and Real Estate
Construction activity remained at very high levels, with housing starts still growing strongly. Labor shortages continued to cause delays. New and used home sales grew at a strong rate, although weakness was reported in Houston. A drop in the availability of funds for lending by REITs has caused an increase in interest rates for commercial projects. Contacts continued to voice concern about overbuilding in the industrial market in some areas.
Energy
Drilling activity continued to plummet, both within the District and around the world, reducing demand for the region's oil field machinery and services. Drilling is declining faster in Texas than in the rest of the United States, down 38 percent over the last year, with the area around Midland and Odessa hurt the worst, with declines of 50 to 60 percent. Oil service and machinery firms say the cancellation of large orders has shrunk backlogs. Day rates for some rigs are near variable cost, and some service companies are offering to take equity stakes in exploration ventures rather than cash. Contacts believe producers are pulling back hard, preparing for a prolonged period of low oil prices.
Agriculture
Harvest is winding down for most crops, but the financial effects of the year's drought and low commodity prices will not be resolved for some time. Wet conditions hampered some harvesting and damaged cotton fields in North Central Texas. Livestock conditions remained good overall, with some supplemental feeding.
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