Beige Book Report: Dallas
May 14, 1975
Deficit financing by the Treasury is adversely impacting on borrowing by district firms. This conclusion was reached in a survey of corporate financial officers who, for the most part, described debt markets as in such poor condition that new offerings are not even being considered. Consequently, some expansion projects are being postponed, and a few companies are resorting to private placement of securities. Some firms also warned of continued shortages of capital during the anticipated economic recovery.
Several firms that have recently sold bonds had to restructure their issues to improve marketability. A manufacturer of building materials, for example, shortened the maturity of a recent issue from 20 to eight years and marketed only 80 percent of the planned issue. And another large corporation recently announced a $250 million offering at 9.25 percent—substantially greater than the yield it had planned just a few months ago.
Only one firm surveyed had canceled a proposed debt issue. That firm, a major oil company, planned to use the funds to complete a refinery. Now funds for the project are being borrowed on a short-term basis—both through the commercial paper market and bank financing. But a representative of the firm said that unless bond markets improve, the company will have to postpone future expansion projects.
Corporate treasurers expect businesses to respond to further crowding out by putting more pressure on banks to increase existing lines of credit and to open new commitments. However, there are reports that banks are exercising greater selectivity in their lending policies. An official for one utility claimed that banks are becoming increasingly reluctant to raise lines of credit to public utilities. And an electronics manufacturing company, which tried unsuccessfully to increase revolving loan commitments at banks around the country, gave a similar report.
Bankers admit to increased loan selectivity, saying they are determined to protect liquidity positions and are not actively seeking new loan commitments. They expressed concern that if the inability of corporations to go into capital markets is prolonged, commercial banks will not be able to meet short- and intermediate- term credit needs. They expect the utilities, in particular, to be hard pressed to operate on bank credit if capital markets remain inaccessible much longer. In addition, several bankers said smaller- and medium-sized companies would ultimately bear the brunt of a credit squeeze. Their reasoning was that when major corporations are crowded out of capital markets, they will turn to bankers who will accommodate the larger borrowers first. Inevitably, less credit would be available for smaller companies.
The latest employment statistics suggest the district labor market is stabilizing. In Texas the number of jobholders has been edging upward while the unemployment rate has dipped below 6 percent. Moreover, indicators of future labor market strength suggest this trend is likely to continue. Initial claims for unemployment insurance have dropped roughly a fifth from the peak reached earlier this year. And the average workweek in manufacturing has climbed to 40.1 hours, up from 39.7 hours in February.
Employment in the construction industry in the district, however, continues to fall. But the drop has not eased wage demands. In the north Texas area, for example, work on approximately 1,300 projects was stopped recently when 26,000 trade union members went on strike. Currently, the union is holding out for a 40 percent hike in the hourly wage rate over the next three years.
The government program to grant a maximum $2,000 tax credit to new home buyers has been termed "largely disappointing" by area homebuilders and mortgage lenders. Respondents to a survey said even though the program has produced some pickup in homebuilding, it has failed to give the industry a substantial boost. Builders offered several reasons for the ineffectiveness. Not all of the potential home buyers are aware of the program. And ambiguities still exist about which homes qualify for the program. Moreover, builders said houses that have been on the market for more than a few months cannot realistically be sold under the program. Because houses must be sold at the lowest asking price (normally the original price), builders cannot recapture interest expenses that have accrued on those homes that have been on the market for some time. Builders generally view the program as little more than a windfall for people already planning to buy; people who were not serious prospects before the program have not been persuaded to buy. The largest homebuilder in the Dallas area summed up his colleagues' views of the program with "if a couple cannot afford the first monthly payment this summer, a tax break next April will not change their minds."
The early fall and back-to-school apparel shows held in Dallas in April were described by market observers as strong. But individual apparel manufacturers were somewhat less enthusiastic. Buying sentiment by retailers, nevertheless, has improved greatly in recent weeks. Nevertheless, apparel production in Texas—which accounts for nearly a tenth of manufacturing employment—is still running about 70 percent of productive capacity.