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Eleventh District economic activity showed signs of contracting in September and early October. Manufacturing activity declined, and retailers reported slower than expected sales. Construction and real estate conditions remained weak, with continued softening in the market for single-family homes. There was no change in financial services activity, and energy activity has not increased with higher oil and natural gas prices. Agricultural conditions have been favorable.
Contacts were significantly more pessimistic about the outlook for growth through the rest of the year, citing concerns about war, terrorism, the dockworkers' strike on the West Coast, declining stock market, and upcoming elections. This widespread uncertainty is leading consumer spending and business investment to be put on hold, they say.
Prices and Labor Markets
Price pressures are mixed. Contacts continued to report high and rising prices for all types of insurance. Prices are up for energy products, including diesel fuel and heating oil. Crude oil prices have also increased over the past few weeks. U.S. inventories are below normal and were cut further by storms that recently struck the Gulf Coast. Contacts believe oil prices are carrying a war premium of roughly $5. High oil prices have pushed natural gas prices upward. Despite near record inventories, natural gas prices remained over $3.50 per mcf for most of the period--25 percent higher than last year.
Price declines were also reported. Retailers say selling prices have dropped over the past few weeks. Home prices have also fallen in some areas. Contacts in the temporary service industry report downward pressure on wages. Chemical producers said the series of price increases for plastic products have come to an end and, for some products, there is pressure for price reductions.
Manufacturing
Manufacturing activity declined, and weakening was widespread across the industries in the sector. Demand for paper products, which has been slowing over the past few months, accelerated its decline over the last month. Apparel producers say demand continued to be slow. Demand for construction-related products continued to soften, although public works projects helped maintain sales levels of concrete, cement, and fabricated metals. Sales of processed food products were up over the last month, however, which contacts suggest is due to consumers staying at home rather than going to restaurants.
The slow improvement that had been reported in the high-tech industry over the summer has dissipated in the past few weeks. Demand has improved for components that go into some consumer products, such as cell phones and personal digital assistants. But personal computer demand remained weak, and contacts say the fight for market share is stiff. Layoffs continue, particularly in the telecommunications industry.
Demand for petrochemicals has flattened. Poor profits and growing inventories of heating oil led refiners to cut back production along the Gulf Coast. Hurricane Lili briefly closed a number of refineries and stopped crude deliveries to the region.
Services
Legal firms say activity has slowed from last quarter but remains stronger than a year ago. Litigation, bankruptcy, and commercial lending activity remained strong, but transactions activity was weak to nonexistent. Demand for temporary services continued to slowly improve. Demand is strongest to supply administrative, clerical, and call centers, while the tech, financial, and light industrial sectors are still sluggish.
Demand for transportation services is still very weak. Airlines reported that the conditions in the industry are bad and getting worse, as the airlines try to adjust capacity to meet demand. The carriers with labor union contracts reported the most difficulty, because they are unable to lower fixed costs fast enough. Leisure travel over the holidays looks promising they say, but business travel is very weak and there are no signs of a rebound. Trucking firms say demand is 30 percent below a year ago.
Retail Sales
Retail sales softened. Stores reported slower-than-expected sales growth or a decline in sales compared to a year ago. Contacts had expected to easily match and exceed last year's depressed September sales and were shocked that sales were below a year ago. Many retailers expressed serious concern that nothing had really changed to precipitate slower demand and have revised down their expectations for sales. Automobile sales have softened in recent weeks and are expected to be 10 percent to 15 percent lower than two months ago.
Financial Services
Overall activity remained flat. Deposit growth was strong, which respondents attribute to increasing amounts of money moving from the stock market to bank accounts. Overall lending activity was unchanged. Mortgage refinancing continues to grow, but contacts reported a recent slowing in auto and consumer lending, particularly for credit cards. Charge-offs and delinquencies are described as relatively stable.
Construction and Real Estate
Construction and real estate conditions remained weak. Contacts say activity in the single-family market has tapered in the last six weeks, although incentives and low interest rates continued to spur sales of lower priced homes. Multifamily leasing activity deteriorated in Austin and Dallas. Office vacancy rates continue to rise and rent concessions are widespread. Public projects remain a source of strength.
Energy
Drilling activity has not responded to higher oil and natural gas prices or expectations for a seasonal increase. Contacts blame the lack of drilling activity on record high natural gas inventories and fears that the current high prices for both oil and natural gas are temporary. International drilling activity also remained flat. Oil service firms say they expected the current downturn to be short and resisted staff reductions. As the downturn persists, however, there is increasing pressure for layoffs.
Agriculture
Production conditions have been favorable. The Texas cotton harvest is expected to be significantly larger than last year, but export demand remains weak. Producers are optimistic that they will get another cutting of hay this month.
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Kansas City