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Overall Eleventh District economic activity showed signs of cooling in June and July. Demand for services remained strong, but manufacturing activity was weaker and retailers said sales growth was slower than expected. Construction activity continued at roughly the same pace, and bankers reported good lending growth without any reduction in loan quality. Energy activity continues to improve. Agricultural conditions are very dry, and crop producers again will have difficulty turning a profit this year despite good crop yields.
Prices
There were more reports of unchanged or declining prices than of rising prices. The steam has generally come out of energy prices. The price of West Texas Intermediate Crude has been near $30 per barrel for the past two months, but fell close to $28 by the end of July. Gasoline demand at the onset of the driving season was softer than some expected, perhaps reflecting some resistance to high gasoline prices by the consumer, and gasoline prices softened. Retail gasoline prices peaked nationally in mid-July, and fell every week after that. Spot wholesale prices peaked in mid-June. Spot natural gas prices fell somewhat due to cool weather in the Midwest and New England, but remained high in comparison to recent years. Natural gas inventories are still 20 percent below a year ago but have been refilled at a steady pace for the past several weeks. Petrochemical producers, who had been reporting no problems passing through much of the increase in feedstock costs due to higher oil and natural gas prices, are now reporting resistance to price increases. Metals producers said selling prices were flat or falling, even though higher energy prices have boosted freight costs. Aluminum producers expressed concern that recent investment has resulted in excess capacity and rising inventories. Aluminum prices are falling, and many firms are offering discounts to complete deals. Lumber prices were lower. By contrast, semiconductor prices have been flat or slightly up. Because chip prices typically fall, recent strength in prices has boosted profit margins of chip manufacturers, particularly for high-end memory and specialty chips. Retailers said stiff competition is keeping selling prices unchanged or declining.
Labor Markets
Contacts continued to report tight labor market conditions, with nearly all industries reporting that the difficulty hiring workers led to salary increases. A retail contact noted that employee turnover has increased because the hot job market is giving workers more opportunities to leave, and new people are not trained properly. The contact believes the lack of employee experience is hurting sales. Real estate firms reported difficulty hiring administrative staff and front desk help and say salaries are skyrocketing. One contact tried to recruit waitresses, bank tellers, or "anyone else with enthusiasm" to help run their properties. A local grocery store chain has left doorknob advertisements addressed to parents suggesting they encourage their children to become associates because the store offers free health insurance, a 401(k) plan, stock purchase plan without brokerage fees, up to $32,000 tuition reimbursement, and "a chance to win cash and prizes."
Manufacturing
Several manufacturers reported weaker demand, but sales remained strong for apparel, food, high-tech products, and inputs to commercial construction. Energy-related manufacturing was slightly weaker. Sales remained steady "at a healthy" pace, according to electronics and computers respondents. Personal computer sales have been strong, particularly to Asia and Latin America. One contact noted that second quarter year-over-year sales were soft because last year there was a proliferation of free low-end PCs and a corporate build-up for Y2K. Demand for semiconductors also remained strong. Some fabricated metals producers reported booming demand to supply the semiconductor, telecommunications, and construction industries. After a strong first half of the year, paper producers reported weaker demand for paper products, including a significant drop in demand for boxes and packing paper. Demand for lumber was down, which contacts attribute to hot weather and lower housing starts. Demand for primary metals, such as steel and aluminum, were weaker than expected, despite strong sales to mining and commercial construction. Refiners reported good demand and excellent margins since the last Beige Book, and they operated at very high levels of capacity. Over the last few weeks, however, their inventories have begun to grow. After reporting strong demand for petrochemicals for several months, producers are now reporting some weakness, especially for ethylene and propylene. Inventories, which had been low, have now begun to rise, which producers attribute to new capacity and a slowdown in demand. Producers of plastics are also reporting weaker demand, particularly for products used in the auto and housing industries.
Services
Demand for business services continued to be strong. Temporary firms are still reporting very strong demand, but the inability to hire workers is limiting growth. Accounting and legal firms also reported strong demand and are optimistic about the outlook. One legal contact interpreted the change in legal work as indicative of a general economic slow down--fewer mergers, acquisitions, and IPOs, and more bankruptcy and insolvency cases. Demand for most transportation services has remained steady and strong.
Retail Sales
Retailers said sales growth was unchanged or slower than a few weeks ago. Many companies said this was below expectations. Most contacts did not indicate significant problems with inventories but some have reduced their purchases through the rest of the year. Auto sales have slowed slightly but remained quite strong.
Financial Services
Overall lending growth remained favorable, according to contacts, who were generally upbeat. Auto lending has been the strongest category, followed by consumer and home equity lending. Real estate lending has been the slowest growing category. Contacts said loan quality was stable, with no appreciable changes in loan loss reserves or charge-offs.
Construction and Real Estate
Homebuilders reported a pick up in sales in June and July. Contacts attributed increased traffic to a combination of continued demand from new job creation and price-cutting by builders to reduce inventory. Builders said inputs--such as wood, concrete, and sheet rock--that were in short supply a few months ago are now readily available. Nonresidential construction activity also was reported as strong, although some developers say lenders are "unjustly" restraining construction because they fear overbuilding. An oversupply of apartments and office space has pushed down rental rates, but contacts remain very optimistic about future demand growth.
Energy
Domestic drilling continues to grow rapidly and faster than generally expected, and demand for oil field machinery and equipment continues to improve quickly. The U.S. rig count rose to 950 rigs in July, up from 866 in early June. Natural gas is still the main driver for drilling activity in the United States, but oil-directed activity has begun to pick up for the first time since U.S. drilling activity turned around 16 months ago. Outside North America, drilling continues to improve slowly, and activity remains at low levels. Weak international drilling continues to put downward pressure on pricing for some oil field products and drilling services. For instance, offshore activity in the Gulf of Mexico is very strong, but excess international capacity in drilling rigs is keeping rental rates on rigs at relatively low levels.
Agriculture
Rain in June helped many areas, but high temperatures in July dried out fields and pastures and left some herds heat-stressed. Contacts say cattle prices have been high and the outlook for livestock producers is positive. Crops were mostly in good shape but some were showing signs of lack of moisture and heat stress. Production costs are again expected to exceed prices received for many crop producers, partly a result of high fuel prices but also low crop prices. Some crop producers would not have turned a profit last year without generous 1999 government payments and are looking for emergency assistance again this year.
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Kansas City