March 15, 1978
Directors and businessmen report that economic activity remains
strong in the Eleventh District. Consumer spending has picked up
with department stores and auto dealers reporting large sales
increases. Manufacturing activity has moderated slightly although
durable goods industries continue to post strong performances. A
further slowing in net savings inflows to banks and savings and loan
associations was recorded in February. Despite higher mortgage
rates, residential builders are optimistic that activity will
continue near last year's pace. With the planting season
approaching, a lessening of farm strike activity is anticipated by
agri-businessmen.
Sales at department stores and auto dealerships rose rapidly late in February. Some of the gains were apparently the recovery of sales lost during recent periods of bad weather. Department store executives say that sales in coming months will show large gains over recent months and will be approximately 10 to 15 percent above year-earlier levels. Auto dealers report that customer acceptance of the 1978 models is good and that there is no more than the usual price resistance. Recent weakness in auto sales is attributed to the effects of bad weather. The outlook for new car sales is described as "favorable" with some dealers adding that sales will be as "good as ever." Inventories at most retail establishments are near desired levels.
Manufacturing activity remains strong, although the pace has slowed since the fourth quarter of last year. Many respondents complain of declining productivity as marginal workers are hired to fill skilled positions. To ease the effect of rising labor costs, some manufacturers are installing more automated equipment. Output in such durable goods industries as fabricated metals, lumber and wood, and machinery is up substantially as their products remain in strong demand. Heavy backlogs of orders exist in many industries. However some metal fabricators report that recent new orders have been erratic or weak. Primary metal producers report only modest growth. Copper and zinc smelters describe their situations as "very bleak." Current operations are only marginally profitable, and the only investments being made are pollution control equipment required by law.
Drilling activity and drilling equipment manufacturers are still operating at capacity and near record paces. Supplies of tubular goods are expected to remain tight well into the second quarter and spot shortages of some sizes are possible. Additions to manufacturing capacity are being planned that will be sufficient to meet the expected growth in demand and should ease the supply situation somewhat. Nondurable goods manufacturing activity remains sluggish. The apparel industry, squeezed by rapidly rising production costs and by stiff competition from imports, is in an unstable position with some firms closing plants. Some jobs are being "exported" as more American apparel manufacturers start up plants in other countries. The sales outlook for chemicals is good for the first half of the year. Capacity utilization is generally in the 85-90-percent range for most chemical producers.
Deposit growth at banks continues to slow, and some switching from savings accounts into CD's is reported. Bankers expect deposit growth to remain slow for the next several months, but report they do not expect disintermediation to become a problem. Loan demand remains strong although some slowing of consumer loan growth occurred in February. Since the second quarter of 1977, business and consumer loans have shown exceptional strength, outpacing historical rates during comparable periods of time.
The 9 1/2 percent rate set last month at most savings and loan associations on conventional mortgage loans appears to have slowed the pace of mortgage lending, however, some S&Ls report turning down more loan requests last month than in previous months. S&Ls are reluctant to commit funds until their liquidity position is improved. Net savings inflows slowed substantially in February from January and remain below year-earlier levels. S&Ls are finding that nondeposit sources of funds continue to tighten as well. Borrowing from the Federal Home Loan Bank is becoming more expensive, and the secondary market has become an unprofitable source of funds as yields there have risen above 9 1/2 percent.
Residential construction firms expect activity to remain near last year's level despite higher mortgage rates. Construction of multi- family units is expected to pick up as vacancy rates continue to fall. Many major home builders have two to three months of business on their books.
Texas currently appears to be a focal point of the American Agricultural Movement. Although the farm-strike movement has gained much publicity recently, agribankers and agribusinessmen anticipate a slowdown in future protest activities. Many farmers have already begun planting crops in South Texas. And with planting dates approaching over the rest of the District, most protesters are expected to return to the fields to prepare their cropland for plantings. However, the exact impact of the farm-strike movement on planted acreage at this time remains uncertain. There is some concern that striking farmers may make reprisals on non-strikers, but no specific cases have been reported.