July 13, 1977
Economic activity in the Eleventh District continues to improve. Although the unemployment rate for the four southwestern states inched up to 5.8 percent, total employment remains high. Directors and manufacturers contacted believe the size off union wage settlements will rise moderately this year, and they see no appreciable slowdown in the current rate off inflation. Industrial production in the District is being bolstered by growing manufacturing output, but transportation equipment remains one of the weaker industries in the Texas economy. High occupancy rates are generating an increase in office building construction. A recent survey of agricultural credit conditions reports reduced cash flows to Texas farmers from low wheat prices.
According to the directors and manufacturers surveyed this month, union wage settlements will continue to rise moderately for the remainder of the year. Most agree that the proposed increase in the Federal minimum wage, when enacted, will boost U.S. labor costs substantially, and they anticipate no appreciable slowdown in the current rate of inflation. Others are concerned that prices might be rising at an annual rate as fast as 8 percent nationwide by the end of the year. However, one director feels that we are currently placing too much emphasis on the problem of inflation. He believes this has intensified the fears of inflation and has reduced plans for U.S. business investment.
Industrial production in the Eleventh District is being spurred by growth in manufacturing output. Increased production is fairly well balanced between durable and nondurable goods industries.
Output of primary metals in Texas is climbing as demand is strengthening for steel and aluminum products. Steel inventories are at desirable levels, but stocks of aluminum are off. Prices of Mexican steel imports are substantially lower than domestic prices, and producers are concerned that Mexican steel will gain a significant share of the Texas market. Production of copper, however, is down because of soft demand and a large buildup of inventories.
Apparel production is exhibiting evidence of further improvement. Demand is strong for women's dresses, lingerie, and accessories, while orders for men' s clothing are now beginning to grow. Manufacturers confirm earlier reports that retail prices for fall and winter merchandise are likely to rise at least 10 percent. As a result, all producers are disturbed that retailers are reluctant' to order significant amounts of high-priced goods in the face of stiff consumer price resistance.
Output of chemicals continues to expand. Input prices are up about 11 percent from a year ago, but most producers have not raised product prices. A rubber manufacturer reports a mild shortage of butadiene, but inventories of most chemicals are in line with demand.
Petroleum refiners are shifting their mix of output from primarily gasoline to winter fuel oil. Some refiners express concern about possible shortages of storage capacity for winter fuel oil because current high levels of gasoline stocks are taking up much of the capacity. However, post-Fourth of July reductions in wholesale gasoline prices, along with strong demand, should lead to a sharp drawdown in stocks.
Transportation equipment production continues to trend downward. Cancellations of the B-1 bomber program will force the Dallas-Fort Worth based Vought Corporation to lay off 260 employees. That is on top of 1,000 layoffs announced earlier when the A7 aircraft and Lance missile programs were canceled. But helicopter sales remain strong, and one manufacturer has hired additional workers recently in order to reduce the rising backlog of unfilled orders for some models. Automobile production also remains high, but 1978 model changeover is estimated to take longer then usual because of large-scale length and weight reductions that are necessary to meet new fuel consumption requirements. As a result, production is likely to decline more than usual during the changeover period.
High occupancy rates are leading to an increase in construction of new office buildings. In Houston and Dallas, first-class downtown office space is 98 percent and 92 percent occupied, respectively. Houston has three major construction projects underway, and two others will soon be .started. Construction of two large projects totaling $300 million will begin this summer and fall in downtown Dallas.
According to our latest quarterly survey of agricultural credit conditions, reduced cash flows from low wheat prices are adversely affecting the financial condition of farmers in the High and Rolling Plains of Texas. Agribankers note that many "tenant farmers" are unable to pay rent, harvest expenses, and cover both the interest and principal of operating loans. Renewals and extensions of operating and machinery loans are up sharply, and numerous farm failures or bankruptcies are likely this year. Many wheat producers, however, minimized losses by grazing out their wheat and sidestepped the added costs of harvesting and hauling. With prices well below costs of production, a large portion of the harvested crop is being stored and placed under the Commodity Credit Corporation loan program. Much of the wheat is being stored on the farm, causing the demand for new storage facilities to soar. Conversely, the survey results show cotton farmers are generally in good financial condition.