September 10, 1975
Two important barometers of construction activity in the Tenth District continue to depict a weak and struggling construction sector. Interviews with home builders revealed a dichotomy in the market, with higher priced houses selling well while the lower priced sector remains depressed. However, almost all respondents paint a very bleak housing picture for the future. In District agriculture, the recent rains have generally arrived too late to benefit the fall crops. On the income side, first-half cash receipts from farm marketings are well below last year, but earlier 1975 farm income estimates will probably still have to be revised upward. Loan demand at Tenth District banks remains weak with the exception of consumer loans, while demand deposit growth is reported to be strong.
Data for the Tenth District on the value of construction contracts awarded and on the number of housing permits issued continue to depict a weak and struggling construction sector. While the current dollar value of all construction contracts awarded in the District rose from June to July, the increase was much less than in the same period in 1974. As a result, the value of Tenth District construction awards in July was more than 22 percent below the year-earlier level. On a month-to-month basis, nonresidential awards and awards for public works and utilities rose from June to July, while residential awards fell slightly. In comparison with July 1974, however, only nonresidential contracts increased slightly, as residential contracts declined and public works and utilities awards fell by more than one-half.
On the Tenth District housing front, a leading indicator of future housing activity, the seasonally adjusted number of privately-owned housing permits issued, continued its decline in June after reaching a yearly peak in April 1975. Similarly, the number of permits issued for single-family units, a component of the total figure, also continued to decline from its April high. Despite these declines, however, both of these statistics were well above last June's level, when the number of permits issued fell precipitously.
Interviews with Tenth District home builders provided significant insight into the interpretation of these data. Without exception, respondents who build houses costing above $45,000 reported a very strong year. One builder stated: "As far as I'm concerned, everyone must be busy now. We're as busy as we've ever been." Another reported starts 15-26 percent ahead of last year, while a third reported the best year in 3 years. For low priced home builders, however, the situation was quite different. Starts, in this case, were about the same as last year, very depressed. As one Home Builder Association spokesman noted: "We're building just for rich people."
Expectations, on the other hand, were almost universally bleak. While virtually no respondent reported an inventory problem, a great fear was expressed of disintermediation from savings and loan associations, with the consequent high cost and unavailability of mortgage money, the price of which has already risen above 9 percent for conventional loans. This fear of disintermediation, due largely to competition from rising Treasury issue yields, was the principal factor mentioned as restricting the recovery of the housing industry.
Little change has occurred in the District's agriculture over the last month. Several droughty areas have received rain in recent weeks, but for the most part, the fall crops will not benefit appreciably from this moisture due to its tardiness. However, the rains have improved pasture conditions and have provided good moisture for the fall seeding of the winter wheat crop, which will soon be underway.
For the first half of 1975, cash receipts from farm marketings in the District were 10.2 percent below the same period in 1974. This compares with an 8.1 percent fall nationally. However, given the developments in farm prices over the last five months, earlier estimates of net farm income for 1975 will almost certainly be revised upward. Interestingly, the sharp run-up in grain prices during July was partly responsible for a 13 percent drop in the placement of cattle in feedlots in seven major feeding states, the first such year-to-year decline since February. Should this trend continue, the supply of grain-fed animals will remain tight longer than previously expected.
Tenth District bankers contacted in a recent telephone survey indicated that except for consumer loans there were few signs of strengthened loan demand. Weekly Reporting Banks data for August showed a similar pattern in that the total volume of loans (other than Federal funds sold) fell more than seasonally during the month while consumer installment loans rose sharply. Surveyed bankers also indicated that they had stepped up their investments in securities in recent weeks to compensate for the continued weak loan demand. Deposit growth was reported to be stronger than seasonal in recent weeks, with a large increase in demand deposits partly offsetting a decline in time and savings deposits.
Bankers contacted in the survey were generally uncertain about the behavior of the prime rate and other interest rates between now and the end of the year. Some bankers thought interest rates were on a plateau and would remain so in the months ahead, while others thought interest rates would continue to rise.