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In December and January, economic activity in the Eleventh District expanded at roughly the same pace reported in the last beige book. Demand for business services remained generally strong, and retailers reported a robust finish to the holiday sales period. Overall manufacturing activity was unchanged. While there was little change in overall lending activity or credit standards, contacts said the commercial real estate lending slow down has eased, with traditional lenders regaining market share from non-traditional lenders. Construction activity continued at a brisk pace, although occupancy rates and rents softened in some areas. Crop and livestock conditions have been generally good.
Prices
Reports from most manufacturers suggest that prices are unchanged or slightly down, but the service sector continued to report rising wages and some higher fees. Warm weather and growing Iraqi sales of crude added to an existing glut of oil, keeping light sweet crude oil prices in a range from roughly $11 to $13 over the last six weeks. For most of December, warm weather held spot prices for natural gas under $2 per thousand cubic feet, but recent cold weather helped push prices up to $2. Petrochemical prices stabilized after falling through much of 1998. Downward pressure on prices for chemicals is expected to grow as new capacity comes on-line throughout the industry, and domestic manufacturers who purchase chemicals (such as pulp and paper) face increasing import competition. Plywood prices stabilized over the past 60 days, but hardwood prices have declined due to large inventories at domestic mills.
Manufacturing
Manufacturing activity expanded at roughly the same pace reported in the last beige book. Demand was up for most high-tech products, unchanged for construction-related and petrochemical products, but continued to decline for energy-related products. Demand was very strong for telecommunication hardware and software systems. Dollar sales of semiconductors declined at a decreasing rate, and one contact estimates that sales growth will turn positive at the end of the first quarter. Strong unit sales of low-cost personal computers and higher-priced business work stations are driving the improvement. Business demand is being stimulated by Year 2000 issues, according to contacts, who expect sales to remain strong through the first half of the year. Cell-phone demand is strong but has slowed due to weaker demand from Asia. Demand for pagers has declined. Producers of corrugated boxes and other paper products reported weaker demand than a year ago. Contacts say that import competition and weak domestic demand have led to an oversupply of paper. One contact suggests that e-mail has reduced the demand for copy paper. Exporters of liner board reported increasing difficulty selling to markets in Southeast Asia and Europe. Demand was unchanged for lumber used in commercial building and the end-phases of residential construction. One contact said wood imports are "easing up a little," noting that Indonesians have defaulted on some contracts to deliver lumber. Demand for cement has been "good," and contacts say the backlog of construction activity will keep sales up at least through the first part of this year. Metals producers say new orders are down. Petrochemical markets are still weak, with prices remaining stable despite a plant explosion and pipeline breakdown, that normally would have caused prices to spike. Refiners reported poor margins and a glut of product. Gulf Coast refineries have been running at capacity utilization rates close to 100 percent in recent weeks. Inventories of heating oil are "huge" according to a contact, who expects it will take months of cold weather to get them into line.
Services
Demand for business services, such as legal, accounting and consulting, continued to be strong, even though many contacts reported soft demand from clients at energy-related firms and in agricultural areas. Some companies that supply temporary workers say they still have more orders than people to fill them, including in Houston. The strongest demand for temporary workers is for systems programmers and to staff call centers and computer manufacturers. While many firms remain optimistic about the outlook, contacts remain wary, citing potential problems for the coming year, such as the Euro, the Asian economy and the stock market. Most contacts expect slower growth in activity in Houston.
Retail Sales
Cold weather and end-of-season discounting spurred a strong finish to the holiday sales period, according to retail contacts. Sales activity was particularly strong during the week following Christmas. Competition was stiff and price discounting was greater than last year, but contacts said inventories are now in good shape. Prices for apparel products are expected to fall further over the next few months. Auto sales continued to be strong, with inventories in good shape. Dealers said selling prices are roughly the same for some models and down 1 percent for others compared to a year ago, because manufacturers have lowered prices for some vehicles.
Financial Services
Contacts reported little change in overall lending activity or credit standards. Seasonal increases in delinquency rates and loan demand are expected to unwind in the first quarter. The commercial real estate lending slow down has eased, with contacts reporting that traditional lenders have regained market share from non-traditional lenders. A credit union contact said they had a record number of personal bankruptcies in November and December. Contacts reported that consumers moved money into shorter maturity instruments such as money market accounts and deposit accounts rather than CDs.
Construction and Real Estate
Construction activity continued at a brisk pace. While new speculative construction of office buildings halted a few months ago, there is still a great deal of new construction under way. Contacts expect this additional supply to be absorbed in some markets better than in others, with a small decline in occupancy rates in some areas. While most contacts predict no change in rents in coming months, a few expect as much as a 10 percent decrease in rents over the next year and have reported softening rents in the past 6 weeks, but noted that this is not yet indicative of the entire market.
Energy
Oil and gas drilling remained in a free fall, with the U.S. rig count falling from 680 to 621 rigs over the past six weeks, which brings it close to the post-World-War-II low of 596 rigs. Oil-directed drilling has fallen faster than natural gas drilling, with only 155 rigs left drilling for oil. The strongest part of the market is offshore drilling, most of it directed to natural gas. Contacts expect the global rig count to reach a post-World-War-II low in the Spring. Demand for oil services and machinery also continues to deteriorate. Producers are cutting back on capital spending, canceling projects, and leaving service companies with rapidly shrinking backlogs. Layoffs are widespread, as the industry tries to shrink to match a drilling market that has shrunk by 35-40 percent over the past year. Producers are being offered price concessions, risk sharing agreements and other incentives by service companies seeking their business.
Agriculture
While producers have not reported severe damage to crops, cold, dry winds have aggravated deficit surface moisture conditions across much of the state. Still, small grain and vegetable crops, such as spinach, cabbage and southern greens, are reported to be excellent. Livestock conditions were mostly good, and producers were taking advantage of forage availability.
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Kansas City