November 10, 1976
The major regional economic indicators suggest that business conditions in the Eleventh District have begun to strengthen. Although mining output is off, production in manufacturing is up sharply, led by large gains in such major nondurable goods industries as chemicals and refining. Housing starts in Texas are at the highest level since January 1973, and there are 19,000 more construction jobs than a year ago. The growth in total employment in the Southwest has reduced the unemployment rate to 6.3 percent from a peak of 7.0 percent in September 1975. This month's survey suggests that new car sales are climbing again, and new orders for women's and children's clothing have picked up. Total bank loan demand remains on a plateau, but loan demand for multifamily construction and irrigation farming is increasing.
Demand for new automobiles appears to be growing, following a lull in sales during September and early October. Part of the recent increase, however, is attributable to fleet sales that obscure underlying consumer demand. However, all auto dealers interviewed anticipate strong sales during the 1977 model year. A few dealers expect sales will pick up significantly now that the Presidential election is over. There is no indication of unfavorable consumer reaction to the reduction in size of GM models or to the average 6-percent increase in new car prices. Some used car sales, however, are attributed to higher prices for new cars. Almost all dealers indicate that their inventories are lower than they would like. Ford dealers are experiencing a slow pickup in deliveries since the auto strike ended, and GM dealers report that it is difficult to get enough of the most popular models.
The outlook for apparel sales is mixed, according to market observers at recent showings of spring merchandise at the Dallas Apparel Mart. The number of buyers at the women's and children's market was 10 percent higher than a year ago, and the volume of new orders was up an estimated 20 percent. Inventories at most buyer outlets—largely "mom and pop" stores—were reported to be low. The biggest price increases were reported for articles made of denim and for children's wear. For all goods, higher priced merchandise tended to sell better than medium- or low-priced goods.
New orders for men's clothing were off at the latest market. Partly because few style innovations have occurred in the past two years, consumers appear content with their current wardrobes. Some price increases in men s clothing have occurred, especially for shirts and worsted goods. Industry spokesmen note that consumer price resistance for men's suits begins at about $165 in department stores, while price resistance for similar goods sold in specialty clothing stores begins at about $200.
Interviews with District bankers suggest that business loan demand continues "disappointedly flat" and in some cases is falling. The long anticipated turnaround has not appeared, and several bankers now put off to mid-1977 an expected rise in business loan demand. Loans to the petroleum industry for drilling and developing fields continue to be the only area of significant strength. Although commercial and industrial loans remain weak, loans to local firms, in contrast to national firms, have been coming in better.
Consumer loan demand is lackluster. With the exception of the Houston area, there is little or no growth in credit card usage or delinquencies. A Fort Worth banker reported that repayments in credit card accounts are outstripping sales, and a Dallas banker noted the high level of savings was impeding growth in consumer loan demand. New car loans are weak because many purchases are being financed through sales finance companies. Several bankers indicated that real estate loans—especially for construction of multifamily housing—have bottomed out and appear to be in an initial state of recovery.
Country bankers report that operating loans for irrigation farming are being spurred by sharply higher production costs and lower market prices for grain. But bankers are firming collateral requirements as a means of reducing loan risks. And many bankers indicate that the net worth of borrowers will become a more important factor in the evaluation of farm loans in the future. A banker in the High Plains of Texas stated that marginal tenant farmers will likely have difficulty in obtaining sufficient operating capital next year to meet their projected needs. Another banker reported that financing of many tenant farmers will likely require more participation of the Farmers Home Administration and/or the Small Business Administration in making guaranteed loans.
Most of the bankers interviewed indicated that with continued expectations for an impending rise in loan demand, they plan to maintain a liquid investment portfolio. Because the tax-exempt advantages of municipal obligations are currently less attractive, the major portion of new acquisitions is mainly comprised of U.S. Treasury issues. More banks, however, are lengthening the maturity structure of their investment portfolios somewhat in order to obtain the higher rates of return available on intermediate-term Government securities and, thus, help offset the slower growth in income from loans.