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The Eleventh District economy continued to expand in February and early March, with some sectors reporting stronger activity than in the last beige book. Retailers said sales growth was stronger than expected, and some manufacturing sectors reported improved sales. Real estate activity picked up, but there continued to be some concerns about overbuilding, particularly apartments. Business service firms reported little change in activity overall. Most financial institutions reported a strong start to 1999, with the exception of banks lending to the agricultural and energy industries. Drilling activity continued to plunge, reducing demand for energy service and manufacturing firms. Dry conditions remain a concern for agricultural producers, with many farmers and ranchers still in serious financial jeopardy after last summer's drought and low commodity prices.
Prices
There continued to be more reports of price declines than price increases. Finding qualified workers remains a problem for most industries, with many contacts reporting higher wages. Crude oil prices stayed between $11 and $13 over the past six weeks, and there was no indication that the glut of crude and oil products was anywhere near an end. Distressed oil companies are selling existing reserves to reduce debt, and the availability of these low-cost reserves is discouraging drilling. With the end of the heating season approaching, high inventories and continued warm weather pushed down heating oil and natural gas prices. Heating oil prices fell below 30 cents per gallon, but returned to 33 cents per gallon by the end of February as refiners pulled unprofitable capacity off line. Heating oil inventories are 17 percent above last year's levels. Wellhead natural gas prices fell from $1.85 to $1.65 per thousand cubic feet during the month of February. Retailers said selling prices were mostly unchanged, and some contacts expect apparel price reductions in the Spring. A number of maintenance outages led to a drop in ethylene inventories and chemical operators announced price increases, but large capacity increases are scheduled in coming months, so price increases are expected to be short-term at best. Prices have increased slightly for many types of semiconductor chips, but continue to decline for telecommunications equipment.
Manufacturing
Some manufacturing sectors reported improved sales growth, but energy-related and most apparel manufacturers continued to hemorrhage. Conditions in the semiconductor industry continued to improve, with contacts reporting that the outlook for prices and sales improved significantly. World inventory of the consumer products that use chips has dwindled and demand in Asia has begun to recover, according to one source. Another respondent noted that several of the smaller producers of memory chips have left the market, resulting in reduced production. Telecommunications manufacturers reported solid gains in demand and a strong outlook over the next year. Food manufacturers said demand remains good, with no signs of weakening. Metals producers report a pick up in demand. Brick and concrete producers reported continued strong sales, boosted by housing starts, low interest rates and commercial building. Demand for industrial paper products was strong, but demand for boxes was weaker than expected. Demand for lumber products softened over the past month and is lower than a year ago, although contacts expect a modest rebound. Refiners have taken capacity off line, and operating rates have fallen by 4 percent to 5 percent. Apparel manufacturers reported weaker sales and layoffs, mostly because of intense competition from cheaper imports.
Services
Business service firms reported little change in activity overall. Demand for legal services was down from a year ago, in part because of slower demand for transactional work such as real estate services. Contacts reported an increase in trial and litigation work, however, and continued strong demand for legal services related to the high tech industry and intellectual property rights, patents and trademarks. Temporary service firms reported little change in activity over the past month, with strong demand from telecommunications firms, call centers, and banks. Demand for temporary workers for manufacturing and defense was weaker and "pitiful" for oil industry workers. Transportation firms reported that activity was mostly stronger than expected.
Retail Sales
Retailers said sales activity was stronger than expected in February. All types of products were selling well, particularly spring merchandise and home goods, such as appliances and furniture. Retail contacts were in good spirits, noting that consumers appeared to be feeling comfortable. One contact attributed the strength of sales growth to an increase in tax refunds. Auto sales were also up, with good demand for trucks and sports utility vehicles. Inventories are tight for some of these vehicles, in part because inventories are still recovering from the GM strike.
Financial Services
Most financial institutions reported a strong first two months of 1999. Auto lending, home equity refinancing and deposit growth all showed signs of strength, according to bankers. Credit quality and delinquency rates remained stable. The only contacts who were not positive were those with high levels of lending to the energy sector and financial institutions in rural areas, who are seeing trouble with agricultural loans.
Construction and Real Estate
Real estate activity picked up in late February and early March, after a slowdown in January and early February. There continues to be no speculative construction, however. Sales of existing homes were exceptionally strong. Office occupancy rates are expected to fall by 1 to 3 percentage points this year, because contacts expect a high level of office completions and slower office leasing. Office and apartment rent concessions continued to be reported in some markets, and contacts still express concerns about some overbuilding, particularly apartments. Industrial construction was slower but leasing activity was steady.
Energy
Low oil prices, large inventories, and concerns that broader structural changes are afoot, are all contributing to a serious decline in drilling activity. Domestic drilling has fallen 23 of the last 25 weeks, and contacts do not believe the rig count has bottomed out. Demand for energy services has declined with the rig count. Demand for pipe, machinery and equipment has fallen more than the rig count because a lot of rigs are being idled, providing a ready supply of cheap spare parts. Offshore drilling had been holding up well, but contacts say some shallow-water rigs are being taken out of service as well. Unlike oil prices, natural gas prices remain high enough to provide some incentive for drilling.
Agriculture
Many of the region's agricultural producers remain in serious financial jeopardy. Agricultural bankers reported that farmers and ranchers continue to have difficulty repaying loans because of last summer's drought and low commodity prices, and producers continue to leave the business. There is concern about the current lack of moisture, and some farmers have delayed planting while waiting for rain. The lack of rainfall has stressed pastures in many areas, and supplemental feeding has been steady. Growth of small grains was slow, but mild temperatures allowed fields to stay green.
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