May 10, 1978
Directors and businessmen interviewed this month report few changes in the strong pace of economic activity in the Eleventh District. Most respondents expect the regional economy to expand at the current rate of increase through the summer and then slow gradually the remainder of the year. Department store and new car sales continue strong despite recent runups in retail prices. Banks report further growth of time deposits, but passbook savings continue to decline at both banks and savings and loan associations. With home buyers anticipating a sharper tightening of the mortgage market in coming months, prospective borrowers are now more actively seeking mortgage commitments before rates and nonrate terms are raised further. Home builders are experiencing a modest "boom" in activity as work delayed by bad weather is being resumed. Manufacturers report only moderate additional gains in their already high level of output. Drought conditions continue to hold down livestock and crop production over a wide area of the District.
Department store sales for the year to date are 15 percent ahead of the comparable period last year, but month-to-month gains are slowing. Inventories are generally in line with current sales levels. Some stores report that price increases on many goods are beginning to accelerate and that retail prices next fall may be 8 percent higher than the year-earlier level. Aside from hedge-buying of jewelry, there is no evidence of a ground swell of advanced purchases by consumers to avoid further price increases.
Continued price markups for imported cars are having little visible effect on sales. The major constraint on overall sales appears to be low inventories of current models at most dealerships.
Bankers report that total deposits continue to show moderate growth on the strength of time deposits—especially issues of large certificates of deposits. Passbook savings, however, continue to post declines. Loan demand remains robust across the board. Petroleum-related and real estate loans are particularly strong. The growing number of energy-related construction projects and the strengthening of the multifamily residential market are providing much of the demand for real estate loans.
Savings and loan association executives are growing increasingly concerned as net savings inflows have dropped well below the level a year ago. Executives believe that consumers prefer to spend their money now rather than having savings reduced by inflation. Despite the slowdown in passbook savings, maturing CD's are generally being renewed. But competition for large-denominated CD's is particularly stiff as rates on some issues have reached 9 percent.
Conventional mortgage rates on 80-percent loans have now risen to 9 3/4 percent in Dallas and 9 1/2 percent in most other major metropolitan areas. A recent increase in mortgage demand was apparently due to borrowers' fears that rate and nonrate terms will be tightened further in the near future. Dallas area S&Ls have begun to shorten their commitment periods.
Residential construction activity remains strong. Much of the recent activity appears to be a catch-up in weather-delayed work earlier this year. Home builders are optimistic that starts will remain near last year' s level and are expecting slowdowns in other parts of the country to free materials and funds to support local construction activity. However, many industry observers are forecasting a slowdown in demand and an excess supply of homes by yearend.
Because of the boom in construction, cement is increasingly in short supply. Cement was unavailable for delivery on one recent day, and construction delays of up to four months have been reported on some projects because of ongoing shortages. Texas, for the first time, has become a net importer of cement, and a growing share of imports is coming from Mexico.
Manufacturers report no major changes in industrial output during the past month. Skilled labor remains in tight supply. There are shortages of small electrical components, and a paper manufacturer notes occasional shortages of rail cars. An aluminum smelter was forced to close recently because of the rising cost of electricity produced by gas-fired generators, but the company reported that its other plants, which depend on lignite-fueled electric generators, are operating at 100 percent of capacity.
Dry weather continues to take a toll of livestock production, while dryland farmers in western areas of the District await more rain to complete plantings. Because of drought conditions, ranchers in South Texas are reculling and reducing the size of herds. One rancher, for example, was forced to sell 400 head of breeding stock to avoid losing them. The lambing rate in the Edwards Plateau area is running half the normal rate. Cotton and grain sorghum plantings are being held up in areas of West Texas until more rainfall improves dryland conditions. Irrigated crops are faring well now, but they, too, will require more rainfall to hold down the high costs of running irrigation pumps and to supplement underground water supplies.