July 21, 1971
Economic activity in the Tenth District apparently is continuing to show moderate improvement, but a high degree of variability prevails by region and sector of the economy. The ordnance, oil and gas exploration, aircraft production, and airline transportation industries remain weak. However, much of the weakness in these areas is offset by improved activity in such other areas as construction, food processing, and agriculture outside the drought area. Financial activity reflects this variability in the economy. Residential mortgage and construction loan activity is generally strong, consumer installment loans are showing steady growth, and commercial loan activity is spotty.
A number of large Army ordnance plants are located in different parts of the District. Civilian employment in these plants has declined by roughly 43 per cent during the past six months. More layoffs are expected in the coming months at two of four plants contacted. Surprisingly, bankers in these areas report no marked local impact from the cutbacks to date. The employees, many of whom were working to supplement family income, frequently left the labor force upon termination of employment or were absorbed in other sectors of the economy where activity was expanding.
The General Motors Corporation laid off 900 employees—about 25 per cent of total employment—at their Chevrolet assembly plant in Kansas City during the past week. They indicate that many of these employees will not be hired back after model changeovers. When production starts on '72 models in late August, employment at the Buick, Oldsmobile, and Pontiac plant is expected to continue at normal rates. The Ford assembly plant is not planning any permanent reductions in its labor force, but will lay off some employees during the retooling period for the '72 models.
An executive for a large airline reported that domestic revenues were not improved by the fare increases granted in recent months. The impact of the higher fares has been offset by reduced passenger travel.
Contrary to national trends, two steel mills in the District report operations are going ahead at full tilt. Strength in the construction industry has served to prop continued strong demand from these mills. Both report that activity in their particular plants is not as vulnerable to national trends as is that of many steel mills.
Excluding western Oklahoma and New Mexicowhere severe drought continues to prevail—agricultural conditions in the remainder of the District are excellent. Wheat production in the District will virtually equal last year's levels, despite the drought in part of the District and the reduced acreage planted. The condition of spring planted crops and ranges outside the drought area is excellent, and production for the District is likely to surpass last year's levels. Agricultural production for the Nation also is expected to be substantially above last year's levels, so farm prices are likely to decline this fall. Despite the anticipated decline in farm prices, farm income for the year as a whole is expected to be above that of last year. In addition to larger production, farm prices are likely to average higher for this year as a whole than last year because grain prices are not likely to decline substantially until later in the year, and livestock prices are expected to remain above the depressed levels of last fall and winter.
Residential mortgage and construction loan activity at District banks continues strong. Consumer installment loans are showing further steady growth; and some bankers are expecting an acceleration in this category. The commercial and industrial loan picture, aside from residential construction loans, appears rather spotty, though a strong volume of loan commitments is widely reported.
District bankers generally feel that the prime rate increase to 6
per cent was fully justified by cost-of-funds considerations and the
demand for loans. They view the current rate structure as one they
can live with—though not in great comfort. Deposit inflows continue
strong, but higher
short-term rates are causing some passbook
account holders to move to consumer certificates of deposit, and
banks are finding large certificates of deposit a little harder to
obtain and hold. There is a widespread expectation that the prime
rate will be at 6 1/2 per cent by yearend unless, as one respondent
pat it, the Fed "opens the gates" to restrain rates.