February 12, 1975
The volume of loans outstanding at Eleventh District banks has fallen sharply since the first of the year. Business loans have experienced the steepest decline, but real estate loans, loans to nonbank financial institutions, and consumer loans have all been reduced substantially. District bankers report the decline in business lending is primarily due to reduced loan demand. But apparently loan officers are being more selective, also. For example, marginal loan requests, which would have been accepted a year ago, are now being turned down.
Inventory loans have fallen sharply as many firms have successfully drawn down materials stocks in line with lower sales. Demand for accounts receivable financing has also declined with sales. Even loans for petroleum and gas operations, which had increased nearly a third in the past year, have dropped. However, rather than reflecting reduced oil field activity, lower loan demand by oil companies has been a result of higher profits, allowing these firms to finance a larger portion of their explorations internally.
Business demand for term financing, on the other hand, is up substantially. Many companies that financed capital expansions partially with short-term loans last year are now trying to refinance these outlays on a long-term basis. In addition, bankers report heavy demand from durable goods manufacturers for term loans needed to finance replacement equipment. However, most requests to refinance existing loans are being rejected because bankers are reluctant to commit funds to long-term obligations.
Demand for real estate loans remains weak. In fact, as described by one banker, demand for interim construction financing is "virtually nonexistent." Meanwhile, an increased flow of funds to thrift institutions has resulted in reduced borrowing by nonbank financial institutions. Requests for consumer loans have also declined substantially as households are deferring purchases of many big ticket items.
Loan renewals at District banks have risen sharply. Renewals by commercial real estate companies have been particularly large. Many of these firms are "totally illiquid," according to one banker, since they have been unable to resell large holdings of nonincome producing land. In manufacturing, loan renewals are most common in construction-related industries and among firms engaged in supplying producers of consumer durables. In an attempt to hedge against shortages and rising prices last year, many of these companies stockpiled inventories. But because sales fell sharply, they have been unable to liquidate inventories and pay out existing obligations. Heavy renewals of loans to individuals for purchase of stock have also been reported.
A survey of large commercial banks in the District reveals that most lenders have recently increased reserves for covering loan defaults. higher profits earned last year provided the chief source of funds to increase loss reserves. And bankers admit that the economic outlook for 1975 practically ensures higher loan losses.
A downturn in business activity in the District has caused a rapid deterioration in the labor market. Growth in total employment has come to a virtual standstill, while the labor force continues to expand. The result has been a sharp rise in unemployment—25 percent in 2 months. And the unemployment rate stands at 6.2 percent, up from 4.7 percent last fall. Layoffs in manufacturing, particularly in durable goods industries, account for much of the increase in unemployment. And barometers of future labor market strength indicate this downward trend will continue. In Texas, the average workweek in manufacturing has fallen to 40.2 hours, after remaining at 40.6 hours for 6 months. Moreover, initial claims for unemployment insurance have doubled since last fall.
Grain and soybean production is expected to rise substantially this year in the Eleventh District states. An increase in acreage planted will help boost winter wheat production nearly 50 percent over last year. Because of low cotton prices, farms will reduce total cotton acreage by 25 percent, and most of this land will be put into the production of soybeans and grain sorghum. As a result, total soybean acreage will increase 28 percent, while grain sorghum acreage will be up 18 percent. The amount of land planted in rice will be essentially unchanged.
Cattle producers continue to face a bleak profit picture. Ranchers, reluctant to cull their herds at depressed market prices, are finding it unprofitable to winter a large number of cattle. The number of cattle on feed in District feedlots continues to fall, down 40 percent from a year ago. Consequently, most feedlots are operating well below their break-even level of production, and several of the largest feedlots have gone into bankruptcy.
While bankers generally report no serious financial difficulties due to the write-off of farm loans, they indicate the number of delinquent loans has risen. Renewals of loans to livestock producers are common, and referrals to the Farmers Home Administration have increased. Bankers are reviewing agricultural loan requests closely with the view that livestock loans will continue to be risky in 1975. And with grain markets weakening, bankers are very concerned that crop farmers may experience a severe cost price squeeze by harvest season.