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Eleventh District economic activity decelerated in March and early April. Contacts in most industries expect activity to remain sluggish throughout the year. Manufacturing activity continued to decline, and demand for business services weakened. Retailers said sales were weak or declined in March, with a slight pickup in early April. Financial service contacts say credit standards are tighter. Construction activity has softened, except in Houston. The energy industry continues to be a bright spot, although activity is still restrained by shortages of crews and equipment. The livestock industry is in good shape, but many farmers face high costs and low product prices.
Prices
There were more reports of price declines than price increases, with downward price pressures particularly noted for high technology products and metals. High energy costs are a concern for nearly all industries, and a few manufacturers have added fuel surcharges. Low inventories for most energy products suggest there will be little relief from high energy prices this year. Crude inventories have been growing steadily but are four percent below the levels of a year ago. Heating oil and natural gas inventories are more than one-third below the levels of last year, which were considered insufficient.
Labor Markets
While some manufacturers reported layoffs, hiring continues in several industries, and there are still reports that quality workers remain elusive. Most contacts say wage pressures have leveled off, but wages have not fallen.
Manufacturing
Manufacturing activity continued to decline in March and early April, with a drop in activity for high technology, metals, petrochemicals and paper products. Improved weather in April led to a slight pickup in sales growth for some construction-related products, such as for some lumber products, cement, concrete, clay and glass. Still, first quarter sales were very poor for these products, down between 6 and 15 percent compared to a year ago.
Sales of high-tech products continued to decline over the past 30 days, according to manufacturers, although some reported signs of flattening out. Sales have been weak in the U.S. and, more recently, Asia. Inventories of cell phones are high, and some say the inventory on hand is becoming obsolete. Inventories remained under control for many other products, such as for personal computers and some semiconductors such as logic chips and power sources. Contacts expect employment levels to continue to fall and capital investment to be significantly lower this year than in 2000.
Metals and paper producers also reported weaker demand since the last Beige Book. Some steel mills have reduced production by as much as 50 percent. Strong demand for metal products used in the oil field has slightly mitigated the negative effects of widespread slowing. Paper production has also been cut to return inventories to manageable levels, and prices have fallen.
Petrochemical producers are facing the worst market conditions in 15 years, and several large producers have declared bankruptcy. Natural gas prices doubled over the past year (a critical input to manufacturing petrochemicals), international demand has dropped and considerable new capacity is coming on line. For instance, eight billion pounds of ethylene capacity is coming on line in 2001--twice the biggest previous increment of new capacity in industry history.
Refiners ran their plants hard for two to three years, but refining margins weakened substantially in March. A number of refineries went into extended maintenance and have been slow to return. The result was a late switch to gasoline, and its inventories are running four to five percent below the extraordinarily low levels of last year. Wholesale spot prices for regular unleaded gasoline spiked from 76 to 96 cents over the past six weeks. Refiners' margins became very strong, giving them a powerful incentive to get facilities back on line and produce more gasoline.
Services
Business services activity continued to weaken in recent weeks, particularly for temporary service firms, where demand has slowed from all types of businesses. One temporary firm reported a 15-20 percent drop in business over the past few weeks. Legal firms also reported softness, with a drop in real estate activity and IPOs; bankruptcies and litigation continue to increase. Demand for transportation services also continued to slow. Railroads, truckers and airlines noted softer sales.
Retail Sales
Retailers reported very weak or negative sales in March. Demand picked up slightly in April, which contacts attributed to Easter sales and better weather. As a result of sluggish sales growth, retailers have reduced their purchases and lowered their expectations for the remainder of the year. Despite sluggish sales, most retailers say inventories are in very good shape, which is helping keep downward pressure off of selling prices. Auto sales are below last year's very high levels, but dealers say sales growth is expected to be "good." Demand is particularly weak for domestic and luxury cars but sales of used cars picked up. Inventories remain at high levels.
Financial Services
Credit standards have tightened. Lenders say they are looking at prospects more closely and increasing reserves on existing loans. Loan demand is unchanged to slightly down. Respondents say that business loan usage is changing. In past years, commercial loans were used primarily to finance expansion, but now an increasing number of new loans are being requested to cover operating costs as a result of slower product demand.
Construction and Real Estate
Construction and real estate activity softened over the past six weeks, except in Houston where activity has rebounded in recent months. Demand for nonresidential space is down, particularly from high-technology firms. Firms are reducing costs by consolidating their office space, leading to an increase in subleasing of commercial space. As a result, office space--old and new--is coming on line faster than it can be absorbed. Commercial starts have slowed, according to contacts, and financing has become more difficult. Homebuilders reported slower traffic and sales, except in Houston where home sales rebounded in March. Overall, contacts were less optimistic about the outlook than six weeks ago and have lowered their expectations for growth in activity.
Energy
Energy activity continues to pick up. Domestic drilling has risen above 1200 working rigs. Shortages of equipment and people are restraining the increase in the rig count, according to contacts. The March international rig count was 515 working rigs outside North America, still ten percent below the last peak in December 1997. The exploration outlook is very strong.
Agriculture
High beef prices are helping boost the livestock industry, but farmers continue to face significant production challenges. Moisture levels have improved, but bankers say some farmers have large carryover debt and are unable to qualify for all or any of the debt requested. Limited water and high energy prices are encouraging farmers to plant cotton instead of more profitable crops, such as corn. However, world wide cotton stocks are already high, and prices are relatively low.
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Kansas City