March 10, 1976
Industrial output in the Eleventh District continues to expand. Chemical production and petroleum refining, two of the largest industries in the District, continue to pace the recovery which began last spring. However, production of oil-field equipment, which has been a mainstay of the District economy, faces the prospects of falling in coming months.
Chemical manufacturers report that three major
markets—
construction-related products, textiles, and automobiles—have
firmed. As a result, they are optimistic that the recovery in
chemical production, initially in response to the rebuilding of
inventories by users, will continue. In addition, producers are
maintaining a constant inventory-sales ratio and are building
inventories of finished goods with the increase in sales. The severe
drought in the southwestern and Midwestern states, however, has
raised the threat that output by the District's agricultural
chemicals manufacturers will fall. Sharply reduced spring planting
intentions, particularly by dry-land farmers, are expected to result
in production cutbacks in agricultural chemicals in the summer and
early fall.
Petroleum refining, part of whose output is processed by the chemical industry, is also expanding. Since last spring, capacity utilization at refineries on the Texas Gulf Coast has risen from 88 percent to 94 percent. Petroleum refineries have also stepped up operations to meet increased demand for gasoline.
Manufacturers of oil-field equipment are still operating near the peak levels of 1975, but a slowdown in worldwide drilling activity has begun to affect the demand for equipment. According to two thirds of the leading manufacturers surveyed, the backlog of unfilled orders is dwindling as the inflow of new orders has slowed, and there has been a substantial rise in order cancellations. One of the District's biggest producers of oil-field equipment said that, unless new orders pick up, they will begin laying off workers by midyear.
The outlook for industrial prices varies widely according to the industry. Prices of agricultural chemicals are expected to remain stable through 1976. Firms producing industrial chemicals, however, have recently announced price hikes for basic and intermediate products. But there is some doubts that these increases will hold. According to one insider, discounts are still commonplace. Several of the largest producers of structural steel, on the other hand, claim they will no longer sell below list prices. Aggressive price cutting last year in that industry resulted in many sales being bid below production costs. Apparel manufacturers say significant price hikes at the retail level are inevitable, since costs are climbing rapidly. And, according to one of the District's largest garment makers, there is virtually no profit margin at current price levels.
The largest department stores in the District report that sales continue at a brisk pace and the strength is broadbased. Roughly half of the merchants surveyed said inventories have now been brought in line with the increased level of sales, but others complained of shortages and slow deliveries. An El Paso merchant, for example, said that in the past six months he has received only 75 to 80 percent of the goods he had ordered. And a large chain in the southwest said that they have already been warned by the textile mills of a substantial shortage of wool goods for next fall and winter. Cash sales are still abnormally high, although credit-card purchases are beginning to rise.
New car sales in early 1976 remain strong, but the composition of sales has changed markedly. Small cars are moving very slowly, while there is a strong resurgence in sales of large models. Moreover, most big cars are sold loaded with extras. Dealers attribute the turnaround in big cars to the increased availability of gasoline and lower pump prices. The consensus of dealers contacted is that customers will continue to buy large models, nearly irrespective of price, as long as gasoline is not in short supply. The resurgence in big-car sales has left dealers with large inventories of small cars, while large models are in critically short supply.
The wheat crop in the high plains of Texas, New Mexico, and Oklahoma has been severely damaged by drought conditions. Bankers estimate that wheat production in the plains will drop at least 40 percent below the level in 1975. The three-state area accounts for a fourth of the nation's wheat crop, and most of the states production is in the high plains.
Most of the nonirrigated wheat has already been lost. Wind erosion has damaged fields, and farmers have chiseled their wheat land to try to control the damage. Bankers report many growers are planning just to control weeds and to prepare their land for next year's crop. However, some farmers will plant sorghum on acreage that was seeded to wheat, provided sufficient rainfall occurs in March and April.
The irrigated wheat crop could still benefit from good rains in the next few weeks. And, for these growers, a good yield is especially critical because of the extremely high production costs entailed in this year's crop. Extensive irrigation has been required, and soaring fuel prices have substantially raised the costs of running pumps. Preplant irrigation for spring crops is also expected to be well above normal.
Because of the drought, winter grazing of wheat in the high plains is virtually nonexistent. A west Texas banker estimates that the number of cattle on wheat pasture is 80 to 90 percent below a year earlier. Most of the grazing is confined to a few irrigated fields.