June 2, 1971
Economic activity in the Southwest is expected to continue to pick up through the end of 1971, in the opinion of the Head Office directors of this Reserve Bank. Employment and business investment have increased recently and are anticipated to rise somewhat more through year-end. There is some feeling that cutbacks in defense and aerospace spending will restrict the expansion. But the industries most directly affected appear to have passed their most critical period. Most respondents did not feel that much progress would be made against inflation between now and year-end. Moreover, they generally thought that both short- and long-term interest rates would rise, on balance, by year-end.
Most of the nonbank directors indicated that their firms, as well as other firms in their industries in the Southwest, were in fairly comfortable positions. Profits are expected to be greater this year than in 1970, and net capital investment is anticipated to rise about 5 percent over last year. These expenditures will be about equally divided between plant expansion and new equipment. In addition, most indicated that they were fairly satisfied with their current inventory positions, given their present outlook for business activity.
However, the directors did present a mixed picture with regard to the current employment situation of their firms. As compared with a year ago, about half of the firms have added people, on balance, while the other half had reduced the number of employees. Those adding more people did so because they either experienced a greater- than-seasonal pickup in business or anticipated one. On the other hand, those with less employees indicated that the drop was due to technological improvements and other efficiency measures that did not require the replacement of some individuals who either retired or resigned. However, the employment outlook for the rest of the year was fairly optimistic. Most of the businesses expect to hire more people in anticipation of improved business conditions, and most respondents felt their businesses' employment trends and expectations are typical of their industries in the Southwest.
The responses of the banking directors also had a comfortable tone. Most indicated that, while loan demands currently are greater than at the beginning of the year, the increase was only moderate. However, they do foresee additional strength during the balance of the year, particularly for real estate loans. They feel their liquidity positions are adequate for present needs and, given reasonable deposit inflows, will be sufficient for the rest of the year. As of yet, the recent backup in interest rates has had no perceptible dampening effect on their deposit inflows.
There was some concern expressed by the directors with regard to the outlook for prices and interest rates. Most felt the rate of inflation would not moderate further by year-end. The nonbank directors indicated that their firms had raised the prices of most of their products by an average of 5 percent since the beginning of the year and would raise prices again before year-end. There was also a general feeling that interest rates would continue to rise moderately through the end of the year. Bank directors felt that lending rates at their banks would also rise over the balance of the year, largely in response to increased loan demand.
Indicators suggest the beginning of a modest recovery in District economic activity. April registrations of new cars in major Texas metropolitan areas were 2 percent higher than in March. Cumulatively, registrations are running about 10 percent higher this year than last. Department store sales through May 22 are running about 8 percent higher than a year ago. Nonagricultural wage and salary employment advanced from March to April and is slightly higher than a year ago. On the other hand, the seasonally adjusted Texas Industrial Production Index fell in April and is only slightly above the level for April a year ago. A drop in the production of transportation equipment was particularly noticeable. The Texas oil allowable was also lowered from 77.2 percent of maximum efficient production in May to 75.4 percent for June. But oil activity is still significantly above levels for a year ago. As a result of drought conditions in the Eleventh Federal Reserve District, wheat production in the five states is expected to drop a third from the year before and will be little more than half the 1969 crop.