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In late September and early October, Eleventh District economic activity was at a high level, but grew at a slower rate than reported in the last Beige Book. Many contacts had become less optimistic about the outlook. Manufacturing activity slowed, retail and auto sales were slower than expected, and there were signs of cooling in the service sector and construction. Energy activity strengthened, however, and construction activity and demand for business services was strong. The financial industry reported no change in loan demand, but activity was slower than a year ago and institutions have increased their lending standards. Recent rains brought much needed water for livestock and improved soil moisture but were too late to help most crops.
Prices
With the exception of energy prices, most prices were reported to be unchanged or lower than six weeks ago. Natural gas price futures hit an all-time high, climbing to $5.50 per mcf. Strong demand kept crude oil prices high. Inventories for crude oil are 5 percent to 10 percent below last year, and inventories are even lower for oil products and natural gas. For example, heating oil inventories are 35 percent below last year's levels. A number of refineries announced they will continue to operate through the October turnaround period to build heating oil inventories. Glass producers said inventories are slightly too large and growing, but selling prices are up, according to contacts, who say they are passing along higher energy prices.
Many manufacturers reported weaker demand than a few weeks ago and, as a result, prices were falling or expected to fall, despite higher fuel costs. Petrochemical producers said they are still unable to pass on higher production costs to their customers. Excess capacity and slack demand have led to falling prices for key products like ethylene, propylene and polypropylene. Paper producers reported large inventories as a result of slower than expected demand, and many companies have taken extra maintenance downtime to try to prevent overproduction. Prices for paper products remained unchanged, but one contact said that they are "on the verge" of price declines. Cement and concrete inventories are back to normal after shortages earlier in the year. Concrete and cement prices are expected to fall as new capacity comes online and have "plummeted" in Houston, where imports have increased competitive pressures. Selling prices for lumber and wood products declined; in some areas the price of plywood fell by as much as 25 percent and lumber by as much as 35 percent since their peak. Wood prices are expected to continue to decline because demand has fallen and supplies are high. Retailers said selling prices continued to be mostly unchanged despite some increased cost pressures, such as from transportation and energy. Most contacts say labor markets remain very tight, leading to increased overtime and rising wages. Some contacts, however, reported a loosening in the labor market. For example, in the high tech industry, while the labor market remains tight, the shake-up of Internet-related companies has freed up some high-skilled workers.
Manufacturing
Manufacturing activity slowed since the last Beige Book, and many contacts were gloomier about the outlook than they have been for quite a while. Demand fell for producers of cement, concrete, glass, paper, petrochemicals, primary metals, lumber and other wood products. For most products, contacts said the slowdown was greater than the normal seasonal slowing and some were quite concerned. Slower sales of paper products, especially corrugated paper and boxes, led contacts to conclude that retail sales will be slow this Christmas. They said this is usually a busy time of year because demand for paper increases to ship items for Christmas. Petrochemical producers reported very poor margins and said they are likely to shut down marginal capacity. Electronics and electrical machinery manufacturers reported that the level of orders and sales remained strong, but growth declined some. Growth in personal computer sales slowed, and one respondent noted that higher market penetration of PCs would likely mean slower sales growth this Christmas season. Sales of PC-related products and services, such as DSL connections and software are expected to accelerate, however. Demand remained very strong for telecommunications equipment and services although contacts say the industry is very competitive. Telecommunications firms say current technologies cannot meet customer demand, and firms are positioning themselves to purchase or merge with other companies to buy technology. Food and apparel manufacturers reported no change in sales. Demand for fabricated metals was strong, according to contacts, who said that high levels of commercial construction and the increase in the rig count have sustained robust sales. Construction of new wells in West Texas boosted sales of cement. Refiners continued to enjoy good margins, and Gulf Coast refineries have been operating at high levels of capacity, roughly 95 percent.
Services
Demand for business services remained strong but there were some signs of slowing. Temporary firms said business was generally robust, with call centers increasing demand for their services. Legal firms reported signs of slowing, however, with an increase in bankruptcy work and litigation but slower real estate, public finance and IPO activity. Demand for transportation services was strong, and most firms raised prices or instituted fuel surcharges as a result of higher costs.
Retail Sales
Most retailers reported little change in sales growth since the last Beige Book. The level of sales growth was slower than in the first half of the year, and contacts were disappointed that sales had not recovered. As a consequence, all respondents had reduced their outlook for sales for the next six months. Despite slower sales, contacts say that inventory levels are in line with expectations. Auto dealers said sales and showroom traffic cooled in October. Both retailers and auto dealers blame sales weakness in part on increased consumer caution because of stock market volatility. In general Houston area retailers and auto dealers were more optimistic than those in the rest of the state.
Financial Services
The financial industry reported no change in loan demand but said activity has been slower than a year ago. Deposit interest rates increased, and contacts cite the uncertain stock market as having resulted in a shift of consumer funds to depository institutions. Small institutions and credit unions reported better activity than larger banks, which rely on off balance sheet activities to generate a larger proportion of income. Large banks say advisory services are down and merger activities slowed. Competition remains a factor in setting price, but institutions have begun to increase lending standards in response to the need to pay higher interest rates on deposits.
Construction and Real Estate
Construction and real estate activity remained strong in most areas but continued to show signs of cooling. With the exception of the Houston area, where new home sales and starts are up strongly, residential markets are softening. Builders say rising interest rates have put some would-be homebuyers on the sidelines. This has stimulated demand for apartments, and vacancy rates fell to 20-year lows in some areas. While demand for apartments is high, contacts report that the market is very competitive leading to significant incentives and rent concessions. Nonresidential activity remained at high levels, although some contacts continued to express concern that demand for retail properties could be dropping off. Increased demand for commercial space in the tech-centers has spurred significant price and rent increases.
Energy
Energy activity continued to strengthen with all areas of the drilling and oil service industry improving. The overall rig count was up from 1000 to 1045 over the past 8 weeks despite a decline of about 15 rigs in the Gulf of Mexico because of tropical storms and hurricanes. This is the highest level for the domestic rig count since early 1991. Natural gas continues to account for 80 percent of the drilling. International drilling is also up, boosting demand for services. Contacts say business is good but not stretched to the limit. International drilling is still 100 rigs below its 1998 peak, and there is some reluctance by the major companies to engage in large-scale projects.
Agriculture
Rain replenished soil moisture and available water for livestock. Cotton yields continued to be greatly depressed, however, and in non-irrigated areas the majority of the crop was declared a total loss. The sorghum crop also has been declared a disaster in many areas. Production from irrigated acres was mostly favorable, however. Supplemental feeding of livestock, and some herd reduction continued. Recent rains have come too late in the season to help pasture recovery because winter dormancy has begun. Land preparation for fall planting remained slow.
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Kansas City