September 13, 1978
On balance, economic activity in the Eleventh District continues to show moderate growth, according to the Directors and businessmen surveyed this month. Current demand for factory output remains strong but does not appear adequate to produce significant gains in total manufacturing activity. Residential construction appears to be headed down as home prices continue to climb and mortgage markets remain tight. Savings and loan associations and banks report little change during the past month in either the inflow of deposits or demand for loans. Department store sales showed a slight advance in August from July's high level. Drought conditions in some areas are causing farmers to plow under damaged cotton crops and ranchers to liquidate cow herds.
Few manufacturers report significant increases in production, as demand for many products appears to have leveled off. One notable exception, however, is the production of drilling equipment. Lead times now extend up to two years on some drilling equipment in response to the heaviest demand in 20 years. One equipment manufacturer complains that high employee turnover is restricting production.
Construction activity remains strong in the District, especially in Houston and Dallas. Overall, however, total housing starts have declined below the level of a year ago. Inventories of unsold homes do not appear excessive in most cities, although some observers indicate San Antonio is nearly overbuilt.
Shortages of material and labor continue to plague the construction industry. Acute shortages of cement have forced some contractors to eliminate Saturday work schedules but otherwise have not caused serious work stoppages. Residential builders, however, have found the cement shortage a hindrance to scheduled completion of sidewalks and streets in some developments. Small contractors appear to be bearing the brunt of the shortages. A new cement plant just began operating in Central Texas which should help ease the supply situation in that part of the state. Other materials in short supply are sheet rock, insulation, and plywood.
Net new savings received at District S&Ls continue to improve slowly, extending the trend of recent months. The gains are attributed largely to the new money market CD's ability to aid the retention of funds, but they have not substantially improved the availability of mortgage credit which is expected to remain tight well into 1979. Mortgage loan demand has leveled off, and conventional mortgage rates remain unchanged at the 9 3/4-percent level. S&Ls continue to rely heavily on FHLB borrowing, which has been running at nearly twice the level of last year. Some respondents reported a reluctance to continue this form of borrowing.
Total loans at some weekly reporting banks appear to have eased slightly in mid-August. As a whole, loan demand appears healthy and reflects a high overall level of business activity in the District. Business acquisitions continue to account for much of the strength in business loan demand. Growth in deposits, however, is largely limited to large-denominated CD's. Liquidity positions appear to have improved in recent weeks. Some banks that had been experiencing a squeeze in liquidity in recent months were able to improve their positions in August by moving more heavily into government securities.
Sales at department stores showed only slight improvement in August as year-to-year gains have been slim for the past several weeks. Inventories remain in line at most stores, although a few respondents reported a higher level of stocks than current sales warrant. The sales outlook is good, but some retail executives expressed concern about the relatively high level of consumer debt. These executives feel that consumers may be more cautious in their spending and that retail sales may slow. One large national conglomerate of department stores is planning on recession in the first and second quarters of 1979.
Hot, dry weather has caused severe stress to the cotton crop in the major producing areas of the District. A greater than normal amount of dryland cotton has been plowed up in the southern High Plains of Texas, and yields are expected to be far below normal. Ranchers continue to liquidate cow herds in drought-stricken areas, but marketings of slaughter cows appear to be slowing down. It does not yet appear that many cattlemen have begun to rebuild their herds. Cow and calf prices are at high levels with some stocker calves reportedly sold for $1 a pound. Feed cattle marketings are expected to be heavy in the nest two months, due to a relatively large number of feedlot placements in the second quarter. This may dampen or delay any seasonal upward movement in feed cattle prices.