January 19, 2000
In December, Eleventh District economic activity remained strong. The service sector reported strong demand, and most retailers said sales were strong. The energy industry continued to rebound, but there were signs of cooling for refining and petrochemicals. Construction and real estate activity also was quite strong, with the exception of home building, which was "slower than usual." Manufacturers reported activity at roughly the same level reported in the last Beige Book, but there were signs of weakening for some construction-related products. Lending activity was unchanged, and deposit growth was up. Agricultural conditions remained dry.
Prices
Price pressures were mostly neutral, with some upward pressure from
higher oil prices but downward pressure from petrochemicals and
some construction inputs. The construction industry reported a significant
easing in price pressures for sheet rock, cement, and concrete,
which were in short supply a year ago. Lumber selling prices have
increased slightly but are lower than a year ago because dry weather
has made logging easier. As Y2K concerns eased, petrochemical producers
reduced inventories, which ended price increases begun last summer
and reduced the price of polyethylene. Margins for major product--such
as ethylene, propylene and styrene--are all below the level of a
year ago. Oil prices increased from $23 to $26 per barrel in the
past few weeks. Transportation firms have used hedging to mitigate
fuel price increases, but their margins are down, and contacts are
concerned about higher fuel prices. Some have instituted fuel surcharges,
and others are considering surcharges. Refiners say they have been
unable to increase product prices enough to make up for rising crude
prices, leading to very poor refining margins. Contacts say prices
for oil field equipment and services remain very competitive, with
no significant increases. Day rates for offshore rigs and supply
boats have bottomed out, however, and have begun to turn around
slightly.
Labor markets have eased in some areas but continue to be very tight in parts of the District, particularly in Austin and the Rio Grande Valley, where contacts say it is difficult to find skilled labor and wages are up. Auto dealers reported difficulty finding workers, and legal and trucking firms say they have raised salaries. Temporary service firms also reported very tight labor markets, but wage increases have been only "minor," which one contact called "surprising." Construction contractors, such as framers, were looking for work in December after being in very high demand for the past few years.
Manufacturing
Manufacturing activity remained strong in December, but some industries
saw signs of weakening. Demand continues to be fairly strong for
electronics and electrical equipment, particularly for communications
devices. Food manufacturers reported little change in demand, with
the exception a canned goods producer who noted a slight Y2K-related
increase. All food manufacturers said they were happy that inventories
were quite low. Paper producers said demand was up for all types
of products. Demand was boosted by customers double-ordering toilet
paper and napkins for Y2K stockpilers. Demand for construction-related
manufactured products was mixed--with some reporting continued strong
sales and others weakening sales. Lumber producers say unusually
warm weather and anticipation of increasing interest rates has kept
demand strong and up slightly from last year. Demand for metal,
glass and brick has also been strong. One brick company said they
had the "largest number of deliveries and backlog ever at the end
of the year," which led to low inventories. Demand for cement and
concrete in residential building has softened slightly in the last
few weeks, however, down roughly 5 percent from last year. Refining
is also seeing some signs of weakening. Weaker-than-expected demand
and warmer-than-hoped-for weather has resulted in high inventories
of petroleum products. Holiday travel was below normal levels according
to contacts, and homeowners seemed to have stocked up on fuel oil
in November, which led to disappointing demand and poor margins
in December. Gulf Coast capacity utilization held steady, but cuts
in production are likely in coming weeks. Demand for petrochemicals
remained strong in December, with domestic demand at very high levels
and foreign demand continuing to improve.
Services
Temporary firms reported very strong demand for their services in
December. One firm said it has been the "best December in ten years"
and the "best quarter in recent memory." Demand from retail and
manufacturing firms was unusually strong according to contacts.
Manufacturing activity usually slows for a week or so in December,
they said, but only slowed for 2-3 days this year. Rising oil prices
boosted demand for temporary workers in parts of the energy sector,
particularly in Houston. Workers with technical and computer skills
continued to be in high demand, but contacts reported fewer IT-related
jobs, which they attributed to Y2K activities wrapping up. Legal
firms also saw continued strong demand for their services, despite
a typical December slowdown in litigation activity. Transaction
activity was good, especially mergers and acquisitions. Real estate
activity was also strong, but contacts expressed concern that higher
interest rates could slow activity. Transportation services reported
weak passenger demand in December--with airlines reporting a greater
than usual number of cancellations, which they attributed, in part,
to Y2K concerns. Rail and trucking firms said that cargo shipments
were unusually strong, which trucking firms attributed to firms
filling their inventories for Y2K. Transportation firms reported
unusually high uncertainty about the outlook for the coming weeks,
in part, because they are unsure if people were stocking up for
possible Y2K disruptions, which would result in fewer shipments
in the first quarter.
Retail Sales
Retailers reported strong sales, with some reporting "phenomenal"
sales, but others were disappointed by demand. Internet sales were
explosive. Retailers said inventories are in very good shape, but
some with Internet sites continue to hold a lot of inventory because
they intentionally brought in huge amounts of product prior to Christmas
to ensure they would be able to fill orders. They said there was
little risk in pre-holiday inventory building because the industry
is fast growing, and they expect to work off the excess inventory
as more consumers turn to the web. Auto dealers reported a strong
December, with strong demand for all aspects of the business, including
new and used vehicles, service and parts, with particularly strong
sales of SUVs and trucks.
Financial Services
Financial institutions saw no significant changes in lending activity.
Deposit growth was up, which contacts believe is partly because
of year-end bonuses, partly because of rising interest rates, and
partly because money that was withdrawn for Y2K is returning to
the banking system. Bankers reported strong profits for the year,
although contacts expressed concern that further interest rates
increases would cut into profits.
Construction and Real Estate
Construction activity remained quite strong, with the exception
of home building, which was "slower than usual" in December but
showed signs of picking up some in the first week of January. Builders
attributed slower new home sales to higher mortgage rates and possibly
Y2K preoccupation or concerns. The inventory of homes remains very
tight. Contacts said warehouse activity was particularly hot, but
office, commercial, and industrial activity also was quite strong.
Multifamily building has pretty much dried up according to contacts,
who say that banks have cut off all financing. Developers note there
is a lot of money looking for deals, but they aren't building without
a buyer.
Energy
The energy industry continued to rebound, with the rig count up
60 percent from the trough last April. The gains have been in drilling
for natural gas, which has reached near peak levels. Oil drilling
has not yet rebounded, however, which a contact attributed to distrust
that OPEC will sustain prices. Until recently, drilling has been
mostly shallow, onshore, and vertical, which has not demanded many
resources. Recently, however, drilling has picked up in the Gulf
of Mexico and gone deeper. In addition, international drilling may
be set for a rebound.
Agriculture
Conditions remained dry, although snow and rain helped improve wheat
growth and pastures in some areas. Harvest of citrus, vegetables
and the remaining summer crops continued, as well as land preparation
for 2000 crops. Livestock conditions continued to decline, and herd
reduction became more widespread. Ranchers are hauling water to
livestock and increasing supplemental feeding--including burning
the stickers off prickly pear cacti so livestock can eat them.