October 13, 1971
A substantial upturn in national economic activity in the near term is generally expected by a sample of business economists in this region. These economists, who indicated that economic activity was improving moderately in the Southwest before August 15, believe that President Nixon's new program will also bring gains to the states of Texas, Louisiana, New Mexico, Oklahoma, and Arizona during the remainder of this year and in the first half of 1972. It is anticipated that these gains in economic activity will increase employment in the District moderately over this period, while the unemployment rate will fall. The banking directors on the Boards of the Head Office and Branches of the Federal Reserve Bank of Dallas similarly believe that local economic conditions will improve. In addition, they anticipate that loan demand will be moderately stronger in their respective areas.
Six of the economists are expecting a substantial upturn in economic activity in the nation for the near future. Housing, consumer spending, and business fixed investment are the sectors which will be the major contributing forces to this development. They believe that this upturn has already started, or is in the process of beginning, and that the improvement will spread throughout the economy during the remainder of this year and the first two quarters of 1972. While the economists are optimistic about economic activity, they indicate little hope for a reduction in the rate of inflation. By a slim majority, some reduction in the rate of inflation is anticipated for the remainder of this year. However, during the first six months of 1972, there is an even split between those economists who expect the rate of price increase to fall and those who expect it to rise.
During the two months immediately preceding the President's announcement of the new program, seven of the ten economists surveyed indicated that the pace of economic activity in their states was improving. Five of the economists stated that the unemployment rate in their states was remaining about unchanged, while three observed some decline and two noticed a small rise. In light of the President's new policies for economic stabilization and assuming Congress passes tax legislation similar to that requested by the President, most expect economic activity in the District to increase moderately during the remainder of this year and in the first half of 1972.
Eight of the economists believe that these developments will moderately increase employment in the District over the rest of this year. However, all anticipate further employment gains during the first six months of next year. The President's plan to reduce Federal employment by 5 percent is anticipated to have very little impact upon employment in this District. Nor do the economists expect that the East and Gulf Coast dock strikes will have much of an impact in the Southwest.
Little change in business investment for plant and equipment in this District is anticipated for the rest of this year. In 1972, most, however, believe that business investment should expand somewhat. Little change in Federal Government spending in this District is anticipated in either this year or the first half of next year. There is an even division among the economists on whether or not there will be further cuts in defense contracts and military spending in this District.
Ten of the fourteen banking directors who were surveyed indicated that business loan demand has been essentially unchanged in the past three months, while five indicated some improvement. A clear majority of the banking directors, however, noted moderately stronger consumer and mortgage loans. On balance, the respondents indicated a greater willingness to make more business loans in the past three months, while the sample was evenly divided among those who had unchanged or improved their willingness to make consumer loans. Willingness to make mortgage loans has, however, remained unchanged during the past three months. Nine of the fourteen respondents expected moderately stronger overall loan demand in their areas in the near term, while five believe that essentially no change will occur.
The current prime rate charged at the banks of these directors ranges from 6 to 8 1/2 percent. However, eight of the bankers are at the 6-percent level. Two of the fourteen banks have reduced their current prime rate recently. Only one of the fourteen directors anticipates a reduction in the prime rate in the near future. The respondents indicated that slightly less than 14 percent of the outstanding loans were lent at the prime rate, while 18.5 percent of their outstanding loans were closely tied to the prime rate. The current rate on consumer, real estate, and security loans varies widely for the banks surveyed. However, the average in each case is close to 8 percent. The average rate paid on passbook savings accounts is 4.5 percent and that on three-month, small-denomination certificates of deposit is 5 percent.