September 14, 1977
The major regional economic indicators suggest that business conditions in the Southwest remain strong, and the Directors and businessmen contacted this month are basically optimistic about the future. Total employment has declined slightly, but shortages of labor in some job categories continue to persist. Department store sales remain moderate, but automobile sales continue strong. Total loan demand is showing further signs of improvement. Drilling activity in Texas is at an 18-year high, while manufacturing output continues to rise with increased production in durable goods industries. Farm machinery output is down as a result of depressed farm prices and incomes. The boon in construction continues with few signs of any slackening.
Consumer spending is strong in the District. Department store sales are up 13 percent above a year earlier, and according to one Director, sales are anticipated to continue to rise at the current pace for the remainder of the year. Retailers remain cautiously optimistic about their overall inventory condition. Inventories are in line with the current level of sales. However, some indicate merchandise on order is heavy, and a buildup of inventories may occur if sales should fall off. Auto sales continue to do well across all model lines. Dealers report that some consumers are buying now in order to avoid announced price increases on 19Th models. As a result, inventory carryovers of 1977 models should be quite small.
District member banks in urban centers are very liquid because of strong inflows of deposits, and loanable funds are readily available. Most commercial banks are currently investing their excess funds in municipal bonds. However, several Dallas banks report that as securities in their investment portfolios mature, they intend to aggressively seek loans for these funds rather than roll the investments over.
Total loan demand is showing further signs of improvement. Consumer, real estate, construction, and mining loans continue to be areas of strong lending activity. Loans to the nondurable goods industries, with the exception of petroleum refining, remain sluggish. However, bankers expect business loan demand to continue to pick up slowly through yearend.
Drilling activity in Texas remains strong, while production of oil and gas continues to trend downward. The number of active rigs in Texas is up 19 percent from a year ago to the highest level in over 18 years. Drilling contractors report a comfortable backlog of development contracts for onshore work. And while drilling activity is expected to slow slightly during the last half of the year from that in the first half of the year, industry forecasts indicate that the total number of new wells and footage drilled this year will be 21 percent and 25 percent, respectively, ahead of last year. Many contractors are ordering new equipment—especially rigs and drill pipe. Shortages of materials have not yet hampered operations, but the shortage of skilled labor is becoming more troublesome.
Industrial production in Texas continues to rise on the strength of durable goods manufacturing. Oil field equipment and building materials output is beginning to press current productive capacity. Spot shortages of many building materials persist in most areas. Builders report delays of up to five months for clay brick, and as a result, shipments of brick from outside the state have increased sharply. Shortages of cement are also reported to be widespread. Production of construction machinery is strengthening, while steel output continues relatively unchanged. Aluminum output is rising on strong demand from the building, container, and transportation industries. Fabricated metals production is improving as orders for farm storage bins pick up.
Production of farm machinery in the District is down, and producers are experiencing a buildup in inventories. Farm machinery and equipment sales have slowed somewhat in recent months because of low farm prices and incomes. Sales are also sluggish, according to one dealer in Central Texas, because farm inventories of machinery and equipment were built up to high levels in the past three to four years. Dealer inventories, on average, have been building with lackluster sales. Farmers have reduced purchases of new machinery and are generally trying to make do with existing tractors, combines, and equipment. Another dealer said parts and repair work are up somewhat, indicating farmers will be trying to make do with existing machinery and equipment for the coming year. In contrast, sales of cotton strippers have been strong, and farmers are expected to increase purchases of hay equipment because of improved moisture conditions and the improved outlook for cattle prices.
The boom in construction activity rolls on. Housing starts remain strong, although they are down slightly from a record high set in June. Construction of shopping centers in Texas more than tripled in the first half of this year compared to the same period in 1976. Much of the increase in commercial building is centered in Houston where rapid population growth and liberal zoning laws have spurred strong development. Some delays in construction activity continue to occur because of both material and labor shortages.