June 11, 1975
The decline in industrial output in the district appears to have bottomed out. The Texas Industrial Production Index, after falling throughout the first quarter, has turned up. The primary reason for the upturn is that many firms had liquidated their inventories to such low levels that increased production was needed to maintain minimal levels of stocks. Petroleum refiners, for example, allowed stocks of gasoline and heating oil to run off in the first quarter of the year before increasing operations. Garment makers have stepped up production in response to a recent influx of orders from large chains and department stores that placed virtually no bookings in the first quarter.
Textile producers also report increased orders but mention that the industry's profit margins are being squeezed. Escalating electricity rates are boosting production costs, and manufacturers consider the market for their goods still too weak to pass on the bulk of the higher energy charges to customers.
Output of construction materials has leveled off after 12 months of decline. Shipments by the district's largest manufacturer of reinforcing steel bars, for example, have stabilized at roughly half the year-earlier level, but a company official maintains the firm is facing a severe cost squeeze. A buildup of inventories in the second half of 1974 forced prices of finished goods down a third from peak levels late last year. Meanwhile, production costs have continued to climb and are the highest in the company's history.
Producers of oil field equipment report plants are still operating at full capacity. However, future production appears to be threatened. Bookings have fallen sharply in the past two months, and many orders have been canceled. Producers trace the softening in demand to the suspension of the oil depletion allowance and to the government's delay in drawing up a definitive energy policy. A manufacturer of offshore drilling rigs reports recent cancellations will probably force layoffs at a plant in east Texas. Producers of oil field pipe have experienced a reduction in new orders as major oil companies are building inventories cautiously, in contrast to last year when they frantically stockpiled pipe.
Steel companies supplying the petroleum industry also report a reduction in orders. An official at one steel mill in Houston says his company, which operated under a deluge of orders in 1974, will have filled its backlog of unfilled orders by midyear.
The boom in drilling activity in Texas that prevailed during 1974 is showing signs of easing. Drilling in the state has dipped slightly below peak levels in the first quarter but remains higher than a year earlier. Wet weather has hampered drilling operations somewhat by limiting the mobility of large equipment.
Recent legislation that increased taxes for oil companies is likely to further dampen drilling. Major companies and large independents, having lost their depletion allowance, are reexamining their exploration budgets. Some signs that the new laws are already adversely impacting on drilling have emerged. Drilling rigs, in tight supply in 1974, are more readily available. Moreover, drilling contractors report lead time for projects has been reduced. The full impact of the increase in taxes, however, will not be seen for several months. Exploratory drilling, which involves heavy financial risks, will be harder hit than development drilling, which increases the number of wells in proven oil fields. But even with the anticipated slowdown, the current backlog of commitments will keep overall drilling high in 1975.
The rate of net savings inflows at district S&Ls, which accelerated in the fourth quarter of 1974, has continued strong in 1975. The composition of these deposits differs from recent years, as a larger portion are passbook savings. The largest S&L in Houston, for example, reports passbook accounts now make up a third of its total deposits. Normally, passbook deposits account for a fifth of its savings accounts. In recent weeks, this trend has accelerated by a large influx of income tax rebate checks. However, S&L officials believe most of these savings are earmarked for summer expenditures, such as vacations. Withdrawals of passbook savings are not expected to strain the liquidity positions of the S&Ls, since the inflow of large deposits—$l00, 000 and over—has been great enough to offset large-scale withdrawals from the smaller accounts.
Despite having ample funds, lenders have been reluctant to lower rates on mortgage loans because the cost of funds remains high and is not expected to decline. Prevailing rates on 80 percent conventional mortgages at S&Ls in the district range from 9 to 9.5 percent. These high interest rates have contributed to continued sluggishness in loan demand, providing little incentive to homebuilders to step up construction activity. Residential building in the district is only slightly higher than the low point early this year.
First year wage increases negotiated in the construction industry this spring in district cities ranged from 6 to 13 percent. In a few cities—El Paso for one—settlements followed strikes by union locals. Wage settlements might have been higher, but the depressed level of building activity helped to hold down the increases. Settlements were larger where there were major industrial or public construction projects under way and in those areas where large national contractors were operating. In Houston, for example, contractors report that the building crafts won increases of 10 to 11 percent, only slightly less than the 12 percent won last year. Important factors in the settlement were the extraordinary amount of work under way, especially industrial projects, and the large concentration of national contractors in the city.