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Overall Eleventh District economic activity continued to decelerate in December and early January. Manufacturing activity declined, with a considerable drop in demand for some industries. Weaker sales growth was reported in the service sector; demand for business services and retail sales decelerated. Construction and real estate activity also slowed, with a substantial slowing in the demand for residential building. Financial service firms said activity was slightly slower and, while credit quality remains stable, most respondents reported continued tightening of credit standards. The energy industry remains a bright spot, with international activity picking up, but a lack of labor and machinery is constraining drilling activity. Freezing weather hampered agricultural conditions.
Prices
Price declines have become widespread, and several manufacturing industries reported rising inventories. Metals producers said weaker than expected demand left inventories higher than desired, and prices are low and falling. Cement and concrete inventories are also high, and selling prices have decreased despite high energy and fuel costs. Prices declined for some paper products, and some firms reported that inventories are a little too high. Lumber producers say inventories are very high and selling prices have dropped "like a rock." Falling construction costs are being passed on to new homebuyers because builders are reducing prices to help stimulate sales. Some telecommunications firms said their inventories are in good shape, but others said inventories are too high. Telecommunications prices are falling fast while costs are just slightly lower. Some telecommunications firms said they are outsourcing production to lower costs. Most retailers said selling prices have been lower than a year ago.
Spot prices for West Texas Intermediate crude oil has declined nearly $10 (more than 25 percent) per barrel since peaking in late November, but remained strong by standards set over the past two years. Crude inventories, which have been very tight, increased slightly in December and are expected to normalize. Oil product prices are generally following the price of crude downward. Ethylene prices fell throughout the second half of 2000 and are expected to continue falling. Feedstock prices for ethylene and propylene have reached unprofitable levels as producers have watched in horror as natural gas prices doubled from what was thought to be an incredibly high $5 per Mcf up to $10. (The highest prices ever reached-even when adjusted for inflation.) A number of plants that convert natural gas into other products have been shutting down, reducing U.S. methanol capacity by 50 percent and ammonia capacity by one-third. Ethylene capacity has been reduced by 10 to 15 percent.
Glass producers noted higher fuel costs, which some firms are passing forward. Business service firms said that fees have been rising but not as fast as their costs. Transportation service firms have increased prices and fares to cover rising fuel costs. Prices are rising for energy-related labor, products and services.
Labor Markets
Labor markets loosened in December and early January but are still tight, according to contacts. Some industries, such as glass, lumber, metals and telecommunications, reported layoffs. Some manufacturers have reduced worker hours because production has slowed. Others are making preparations to shut down production and lay off workers in case the situation worsens. Wage pressures have eased in many industries. Telecommunications firms say they are hiring at a new, lower pay schedule. Several business and transportation service firms were also hiring. Most service firms said salaries are still high, but wages have not risen notably.
Manufacturing
Manufacturing activity has decreased since the last Beige Book, with nearly all contacts reporting falling demand. Bad weather, the weak stock market and a weaker outlook for the U.S. economy were cited as explanations for the drop in demand. Import competition and new capacity coming on line were exacerbating supply imbalances for some industries, such as lumber and steel. Sales growth weakened sharply for producers of high tech equipment, such as computers, semiconductors and communications equipment. Businesses have begun to curtail technology-related investment, according to contacts, who added that consumer demand for PCs has been weakening since the Fall of 2000. Demand for construction-related products, such as glass, lumber, cement, concrete and metals, softened significantly, which contacts attribute to a combination of seasonal factors, tighter credit, declining consumer confidence, import competition and bad weather. Many lumber companies are shutting down plants. Steel producers say competition is very stiff, and smaller producers are particularly concerned about their outlook. Sales of corrugated boxes have also declined over the past month. Demand for apparel manufacturing slowed in the fourth quarter of 2000, and inventories are heavy for some firms. Demand for petrochemicals has dropped in all markets, including housing, autos and consumer packaging. The petrochemical industry continues to struggle with a glut of capacity and soaring costs, and margins have fallen sharply. Excess capacity is expected to weigh heavily on the market through 2003. In contrast, refineries on the Texas and Louisiana Gulf Coast operated at high levels of capacity utilization in recent weeks, between 96 and 99 percent.
Services
Demand for business services was lower, and sales growth was weaker than reported in the last Beige Book. Demand for temporary services continued to be robust for energy-related firms in Houston. Demand from the manufacturing sector remained moderate, but contacts noted some slowing from telecommunications and PC firms. Legal and accounting firms reported slightly slower activity over the past six weeks, but said business was still "good." Transportation firms--airlines, trucks and railroads--reported slightly slower demand over the past six weeks, which contacts attributed to bad weather and a slowing economy. Demand for services from the telecommunications industry also continued to decline, and contacts said demand growth was lower than a year ago.
Retail Sales
Retail sales were up slightly over last year, which retailers said were "slower than anticipated but not a disaster." Weak sales growth was attributed to bad weather and slower consumer spending because of high utility costs and the weak stock market. Sales were noted as particularly weak for men's and children's apparel, while shoes and outerwear were areas of strength.
Financial Services
Growth of overall lending activity slowed slightly--with smaller institutions and credit unions reporting brisker activity than larger institutions. Commercial lending slowed some--with the exception of that related to the energy industry. Residential real estate lending remains stable to slightly up, which bankers said was due to lower long-term rates. Contacts say that credit quality remains stable, with no reports of increasing loan loss reserves or increased delinquencies. Most respondents reported continue tightening of credit standards.
Construction and Real Estate
Sales and construction activity slowed over the past six weeks, which contacts attributed to normal seasonal slowing and a drop in consumer confidence. Demand for home building slowed substantially, according to contacts. Non-residential activity also was weaker over the past few weeks. Most contacts say they are optimistic about the overall health of the real estate markets, but expressed concerns about the recent slowing. Respondents contacted after January 3rd said they had revised their outlook upward following the interest rate cut.
Energy
The U.S. rig count flattened out at near 1100 working rigs. More exploration work is being done, as opposed to easy expansions of existing fields. International work is picking up, increasing demand for Houston-based services and equipment. Constraints to the number of active rigs have been reached, both in terms of people and equipment. Global competition for people, equipment and manufacturing capacity is expected to restrain domestic activity. Drilling expenditures from producer capital budgets is widely forecast to increase by 20 percent or more, but half or more of the increase is expected to be consumed by rising prices of labor, oil field services and machinery.
Agriculture
Cold, freezing temperatures damaged fruit trees, slowed planting and impaired livestock conditions. Supplemental feeding of livestock continued, but hay supplies were difficult to locate in some areas. Cold, wet weather delayed planting of the winter wheat crop, and in some areas it is now too late to plant. While crop growth was hampered, recent freezing weather isn't expected to affect yields.
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Kansas City