September 10, 1975
On balance, economic barometers of the Eleventh District indicate recovery is under way. The unemployment rate in the District states peaked at 7.4 percent in May and by July was down to 7.0 percent. Additional strength in the labor market is evident. In Texas, which accounts for roughly 60 percent of total employment in the District states, initial claims for unemployment insurance have fallen to about half the peak level last February. Moreover, the average workweek in manufacturing in the state stands at 40.6 hours, up from the low of 39.7 hours.
In addition, industrial production in Texas-over two-thirds of all industrial output of the District states-has trended upward since March with increased petroleum refining and output of chemicals and primary metals. The rise in production levels has boosted the Index of Manufacturing Capacity Utilization at an annual rate of 3 percent.
Consumer spending in the District is also strengthening. Department store sales, seasonally adjusted, have risen 11 percent since April. Executives of the District's leading retail stores report a solid recovery is under way. Increased sales are broad-based across all consumer product lines, inventories are generally at low levels, and credit card delinquencies are well within acceptable limits.
New car sales are booming. Seasonally adjusted registrations of new cars in the four largest metropolitan counties of Texas rose 16 percent and 11 percent in June and July, respectively. A survey of new car dealers indicates August sales are keeping apace with July's sales rate. A consensus of those polled suggests that, unlike last year, price hikes for the 1976 models are having only modest impact on sales because the announced increases are much smaller than the markups were on the 1975 cars. In addition, on Detroit's recommendation, dealers are down-playing the price differential. Dealers expect 1976 to be a reasonably good model year, particularly since there appears to be a strong rebound in company car sales and fleet leasing, a market that dried up a year ago.
Homebuilding in the District remains badly depressed. While single- family construction is down only slightly from a year ago, apartment building has fallen sharply. In Texas, for example, the number of building permits for multifamily units is running nearly two-thirds behind the pace of a year ago. Lenders report that the costs of building and operating multifamily complexes—particularly utility costs—are rising so rapidly that apartment construction cannot be profitably undertaken. Even in Houston, where homebuilding has held up better than in any District city, multifamily construction is down more than a third from last year's level. And in San Antonio, the inability of apartment owners to recover costs has resulted in 41 notices of foreclosure this year, representing $45 million in property value.
A survey of the largest savings and loan associations in the
District indicates mortgage markets are tightening. In July, the
rate of saving inflows at District thrift institutions slowed and
withdrawals increased sharply. In August, disintermediation
accelerated. Thrift institutions in Houston appear to have been the
hardest hit. The largest savings and loan association in that city
had a net savings inflow of only $500,000 in August, as compared to
$7 million in July. Four other associations in Houston reported net
outflows in August. In Dallas, the leading S&Ls stated net
deposit inflows in August were down to roughly half of July's pace.
As a result of deposit losses, several mortgage lenders warned that
their institutions are rapidly approaching a liquidity crunch,
particularly since liquidity requirements were raised
September 1.
Faced with tighter liquidity positions, most thrift institutions in the District have raised mortgage rates a quarter of a percentage point since midsummer. Moreover, the consensus of the savings and loan officials contacted is that rates will continue to climb. The president of a large S&L in Houston admits that in anticipation of higher yields by year-end, he has raised loan rates above the prevailing rate to discourage borrowing at the present time. Instead, he plans to wait and aggressively seek loans after rates have climbed another half point.
Rising costs of savings are also exerting upward pressure on loan rates. All the thrift institutions contacted reported portfolio costs are continuing to climb. The president of an S & L in Dallas, for example, said the cost of his savings portfolio had risen from 5.96 percent to 6.53 percent in the past year, or nearly 5 basis points a month. A primary reason for increased portfolio costs, according to these lenders, is a shift of savings out of passbook accounts into 7 1/4 percent and 7 1/2 percent certificates of deposit.
Disintermediation is expected to worsen. Moreover, the expectation that the country is entering another period of tight money is already curtailing homebuilding. Virtually all the S&Ls surveyed reported that contractors have cut back sharply on the number of units they are planning to build to avoid being left with sizable inventories of homes when mortgage money dries up.