August 13, 1975
Industrial output in the Eleventh District turned up in June after trending down since last November, and a recent survey of the largest manufacturers in the District indicates gains in output are continuing. New orders have picked up this summer, and since inventories of most finished goods are at low levels, this firming in demand is translating into stepped-up production. For example, output in the chemical industry, the District's largest, is on the upswing. Chemical users, having worked off the high level of stocks accumulated in the last half of 1974, are beginning to replenish inventories, and production has now turned up after declining sharply since last fall.
A big influx of orders has also prompted apparel and textile firms to increase production schedules. Manufacturers claim inventories at all levels of the garment industry—retailers, suppliers, and distributors—are very low. As a result, one of the District's largest garment makers said his goods are being shipped as soon as they are produced.
Virtually all the manufacturers surveyed said that raw materials are readily available, but input prices continue to climb. Because final demand remains weak, prices of finished goods have held steady, and in some cases have fallen. Profit margins, consequently are being squeezed, and in some cases production costs are not being covered. Producers of structural metals, for example, have been particularly hard hit. A large manufacturer of reinforcing steel bars, reported a 20 percent increase in the cost of steel scrap—his principal input—this summer. Meanwhile, the market for construction remains weak and, as a result, most shipments have been priced below production costs.
Once demand firms, however, many manufacturers say they will try to regain their traditional profit margins. Therefore, as economic recovery gathers momentum, prices of manufactured goods are expected to climb substantially.
Auto sales in the District have turned up sharply. New car registrations in the four largest metropolitan counties of Texas were 14 percent higher in June than in May. A survey of new car dealers suggests July sales were even better. An upswing in consumer confidence contributed to the upturn in sales, but dealers believe the announcement of higher prices for next year's models was also a major factor in spurring sales. Moreover, dealers say consumer expectations of higher prices should keep demand for 1975 models strong.
In anticipation of increased auto sales at the close of the current model year, dealers have placed large orders to replenish their inventories. But, largely because of plant closings, new cars have been, and will likely remain, in short supply. As a result, dealers claim a significant volume of sales is being lost. A Fort Worth dealer, for example, says the maximum order Ford allowed him is well below what demand warrants. This lack of inventory, he maintains, is holding down sales at least a third.
District banks have increased their holdings of municipal securities about 5 percent this year, or over four times the national average for commercial banks. Net additions to municipal portfolios are expected to continue, at least through the remainder of 1975, as the New York City situation is having only a minimal impact on municipal markets in the District. Although buyers have become more conscious of the creditworthiness of issues, municipalities in the Southwest are generally on sound financial footing. In fact, issues by District cities are currently being oversubscribed.
Farm and ranch income in the District states has fallen sharply this year. Cash receipts from sales of livestock and crops for the first five months of 1975 were 19 percent less than for the corresponding period last year, compared with a 9 percent decline for the nation. But costs of producing food and fiber have continued to climb.
The resulting financial squeeze was reflected in a midyear survey of agricultural credit conditions in the District. Repayments of outstanding bank loans have been sluggish, and the number of renewals and extensions of loans has risen substantially. As a result, bankers are much more selective in their lending, and many have increased collateral requirements on loans.
Narrow profit margins are making it increasingly difficult for farmers and ranchers with limited equity to meet more stringent credit requirements to finance this year's production. Consequently, bankers report the turndown rate on new agricultural loans is up significantly. Areas where cotton and cattle are the principal agricultural enterprises have been the hardest hit, as evidenced by the high number of referrals of loan applicants to nonbank credit agencies. Moreover, many of these referrals have been to various emergency programs of the Farmers Home Administration, reflecting the severity of the cost-price squeeze facing producers.