July 9, 1975
The volume of loans outstanding at Eleventh District banks has remained essentially unchanged in the first half of 1975. A survey of large banks reveals lending has fallen well short of projections made at the beginning of the year. And weak loan demand has led most banks to lower loan projections for the remainder of 1975. Bankers admit, however, to a significant role in holding down loan volume, primarily by being increasingly selective in granting credit. In particular, they have applied more stringent cash flow and liquidity criteria to loan applicants. Most respondents are turning down some loans they would have made a year ago—particularly term loans.
Demand for commercial and industrial loans is particularly weak. Bankers said part of the depressed demand for these loans reflects the use of the commercial paper market by some customers. But most District firms have simply reduced their borrowing in line with depressed business conditions. Inventory loans, for example, are off, as most firms have completed trimming stocks and have not yet begun to reorder in significant volume.
Sluggish loan demand has resulted in major banks being "besieged" with requests to participate in their loans. With their loan volume depressed, however, these banks are turning down most requests. Petroleum-related lending, on the other hand, remains strong. Producers of oil field equipment are reportedly building inventories to fill a backlog of unfilled orders and to meet heavy demand expected in the second half of the year. But several bankers have been warning these firms to begin trimming inventories in the light of indications that the boom in investment by petroleum companies may be easing.
All phases of real estate lending are lackluster. Bankers reported only a modest pick-up in interim construction loans. Even in Houston, which, until recently, seemed isolated from the nationwide slump in building, interim construction lending has fallen sharply.
Loans made for purchases of raw land by developers continue to pose problems for real estate loan officers, and banks have grown extremely cautious in making these loans. One banker claims "the problem with these loans is illiquidity and not insolvency." A Fort Worth banker, however, reports a recent rash of foreclosures on this type of venture. Builders in Fort Worth and Houston say very little land has been developed in the past year. A severe shortage of residential lots has arisen, further dampening home building.
Consumer loans at District banks have edged downward since the first of the year. Virtually all the decline has been in installment lending, primarily automobile loans. Credit card volume, meanwhile, has generally been flat.
Seasonally adjusted department store sales in the Eleventh District have risen over 10 percent since mid-April. Purchases of durable goods have shown marked improvement, particularly such big-ticket items as furniture, appliances, and color television sets.
A survey of the largest department stores in the District reveals that inventories are very low. None of the stores contacted considered their inventories too high, but about a third of the respondents said they were understocked. Consequently, some sales were being lost. Nevertheless, retailers are determined to keep stocks low. They said that recent increases in sales do not necessarily signal an upturn in consumer spending. The gain could well be temporary, largely the result of the tax rebates. So inventory orders by retailers in the third quarter are still planned to be conservative. An El Paso retailer, for example, said most of his recent buying had been limited to "filling holes" in his inventory.
Crop and livestock conditions in District states are above average. The winter wheat harvest is progressing well and yields have been generally good. Cotton, sorghum, and rice crops are growing satisfactorily. Pastures and ranges are in good condition, with abundant grazing available.
Marked improvement in the fed cattle market has resulted in a 19-percent rise in the number of cattle placed on feed in May. But despite increased placements, the number of cattle on feed in Texas on June 1 was 42 percent less than a year earlier. Texas ranchers have sizably reduced their cattle herds, as the number of cattle and calves slaughtered in the first five months of this year was 43 percent more than in the same period in 1974, despite a 22-percent drop in fed cattle marketings.
Although growing conditions are favorable, farmers are concerned about prices for both crops and cattle this fall. Cash receipts from farm and ranch marketings in the District states in the first four months of this year had dropped 27 percent from the same period last year. The decline in sales reflected lower farm prices for both livestock and crop marketings.