July 12, 1978
The fast pace of economic growth that began in early spring continues, but a slowdown in business activity is forecast by fall, according to the Directors and businessmen surveyed this month. Department store and new car sales are well above year-earlier levels, and manufacturing output—led by durable goods production—continues to grow steadily. Business inventories are being closely managed, and there is little evidence of inflation hedging. Savings inflows to S&L's are slightly improved, but the strong demand for mortgages is keeping that market tight. Bankers indicate they can meet projected loan demand even though deposit growth continues to slow. Agribankers report farm loans remain strong, but repayments are slow and loan renewals and extensions are frequent.
Retail sales are growing at an unsustainable rate, according to survey respondents, and a slowdown from the current strong pace is expected in coming months. Department store sales are running 15 percent ahead of year-earlier levels, and much of the strength is attributed to advanced buying in anticipation of higher inflation. Several auto dealers report record sales levels for new cars, while the market for used cars has softened. Foreign car dealers continue to report their sales are being held down because they are unable to get a sufficient number of new cars. Many sales are being made because buyers realize prices for current models are likely to be much less than for the 1979 models. Therefore, dealers expect new car sales to slow when this model year comes to an end.
There has been little change in the steady rate of growth in manufacturing output this summer. Most of the strength continues to be centered in the durable goods industries. Producers of cement, aluminum, and fabricated metal products are operating at full capacity. Business for aircraft manufacturers is also on the rise. General Dynamics has begun full-scale production of the F-16 fighter plane, which will raise employment at the Fort Worth plant through 1980, and Bell Helicopter reports growing sales for its civilian aircraft. Although the firms indicate that there are tight supplies of aluminum, titanium, and avionic components, the effects of the shortages have been dampened by careful planning and early ordering. In nondurable goods manufacturing, apparel firms are operating at 80 percent of capacity. Summer sales are up, but a decline is anticipated by fall. Apparel manufacturers are having difficulty passing on price increases, and profit margins are squeezed.
Businesses are maintaining close control over inventory levels, and stocks at most trade and manufacturing establishments are reported near desired levels. Expectations of higher prices are tempting some businesses to hedge their inventory positions by making advanced purchases, but the higher costs of financing inventories and the increasing concern of a recession are prompting many firms to hold. down inventory levels and not to hedge against inflation.
Savings inflows are slightly improved since May at District S&Ls, even though the rates of inflow are down as much as 50 percent below year ago levels. Deposit gains are particularly strong in the Dallas-Fort Worth area. Some of the improvement is due to the marketing of the new six-month money market CD's. S&Ls report that 40 to 60 percent of the new issues represent new deposits. Despite the small improvement in deposit flows, there appears to be no letup in the demand for mortgages. The size of mortgage loans continues to be increasingly restricted to 80- and 90-percent loans with the mortgage rates bumping up against the 10-percent usury ceiling.
Lending activity at commercial banks continues to climb with demand expected to remain strong for the rest of the year. All categories of loans are contributing to the growth with petroleum and real estate loans leading the advance. Although deposit growth continues to slow, most banks report their liquidity positions are adequate to meet projected loan demands. There is, however, a growing number of banks reporting tight liquidity positions. Large denominated CD's remain the primary source of deposit growth at large reporting banks, while six-month money market CD's are contributing little to overall growth.
Demand for agricultural loans remains strong, but repayments are slow, and loan renewals and extensions are frequent, according to our latest survey of agribankers. In addition, the number of referrals to nonbank credit agencies continues to rise. Demand for feeder cattle, crop storage, and farm operations is expanding, and the demand for farm machinery is improved. A third of the respondents consider their loan-to-deposit ratios are too high, compared to less than a fourth of the bankers three months ago. Most farmers continue to be in worse financial condition than a year ago. Some improvement, however, is noted in Oklahoma and East Texas, while dry weather continues to hamper farmers elsewhere in the District.