July 14, 1976
The economic recovery in the southwest has slowed, and although many signs of strength are still evident, some areas of weakness are currently hampering further overall improvement. This month's survey touches on retail sales, construction, drilling activity, and cattle feeding. The results suggest a mixed economic picture. New auto sales are strong and the pace of residential housing starts is again picking up after leveling sing off for four months. Moreover, drilling activity should increase further over the remainder of the year - especially if the interstate price of natural gas is raised. Despite the areas of strength, department store sales have softened. Highway construction remains one of the weakest sectors of the Texas economy, and placements of calves in feedlots have slowed because fed cattle prices have fallen well below production costs.
Sales of new cars and pickup trucks are strong throughout the District. The biggest demand continues to be for intermediate size cars. Demand for large models is also up sharply largely because General Motors plans to reduce the size of many large models in the 1977 production year to the intermediate size range. The auto dealers surveyed feel the announced 6 percent price increase for the 1977 models has had no effect in stimulating purchases of the remaining 1976 models. Inventory levels of intermediate and large model cars and trucks are low, and some dealers are completely out of the most popular models or will be before the 1977 models are introduced. Inventories of compact cars, however, are plentiful as sales of these models have not met previous sales expectations. Large price discounts will likely be necessary to move the current inventory of small cars.
Most respondents in a survey of department store executives described business as "pretty good" but pointed to a softening in sales in the past few months. About half of the respondents felt the softness was centered in durable goods, and about half felt the weakness was largely in nondurable goods. Inventories are generally on the "high side," but remain at manageable levels. As a result, most department stores continue to take a conservative approach to building inventories, and some have found the time required for delivery of some goods has begun to stretch out. All respondents felt retail sales would show steady improvement in the last half of the year.
After leveling off for four months, the pace of residential construction in Texas has again begun to quicken. Most of the activity continues to be in single family starts, but some builders look to a significant improvement in multi-family construction by the beginning of next year. One reason for the slower than normal recovery in single family housing, according to a San Antonio contractor, was the news media publishing stories that new homes have become unaffordable. Another builder attributes the current strength in new starts to the fact that people now see that they can make mortgage payments despite higher prices and interest rates.
With the exception of single family housing, construction activity in the southwest remains depressed, and one of the weakest sectors is highway construction. In Texas, the growth in highway construction funds has tapered off with slowdowns in both federal funding and state tax revenues. And with road building costs rising at an estimated 15 percent per year, actual construction put in place is being sharply reduced. A few contractors have gone out of business, while others are selling off used equipment and are cutting back their work forces. The decline in demand for materials used in road building is largely responsible for the depressed market for construction steel and reduced output in the stone, clay and glass industry.
Although the number of active drilling rigs in Texas is about 4 percent below the high levels attained a year ago, an increase began a month ago and most industry spokesmen anticipate further gains in drilling over the remainder of the year. But many drillers no longer expect the gains to be as strong as anticipated two months ago. Activity seems to be restrained by the rollback in prices for crude oil, and many drillers report that proposed tax law changes and the threat of divestiture could discourage investment in the industry. Nevertheless, many independent drillers expect that the Federal Power Commission will raise natural gas prices from $.53 per thousand cubic feet to as much as $1.50 by September. If a large increase is granted, exploratory drilling for gas should rise sharply.
Placements of calves in southwestern feedlots slowed considerably in June from the increased levels of late 1975 and early 1976. Bankers financing cattle feeders expect placements to remain low as fed cattle prices have edged below feeder cattle prices and the cost of grain. One banker reported that with current prices for fed cattle around $40 to $41 per hundredweight and the cost of grain near $48 per hundredweight, cattle feeders are incurring heavy losses. Considering the losses, cattle feeders and bankers are cautious about placing new cattle on feed. Thus, the demand for feeder cattle loans has weakened. The weakness in fed cattle prices apparently is caused partially by the increased slaughter of heavier weight grassfed calves as prices for feeder calves are restrained by the lower demand for feedlot replacements.