October 11, 1978
The Directors and businessmen surveyed this month report no significant change in the strong pace of economic activity in the Eleventh District. Auto and department store sales continue to grow. Low inventory levels have limited new car sales somewhat, although inventories at department stores are more than ample. Manufacturing activity also remains strong, and construction of new plants and expansions is well ahead of a year ago. Loan demand at both banks and savings and loan associations appears to have slowed from the peak rates recorded earlier this year, while deposit inflows continue to grow moderately. Our October survey of agribankers indicates funds available for farm loans are in short supply.
Auto sales are up across the District and could be even better if dealer inventories of 1978 models were larger. Bargain hunting for 1978 cars is on the rise, but early sales of the 1979 models are strong. Several dealers also note that used car sales have picked up recently in response to higher new car prices.
Department store sales remain 12 to 14 percent ahead of a year ago. Many merchants, however, appear overly optimistic as to prospects for sales, and excess inventories have developed at a large number of stores. Several stores are using promotional efforts to reduce excess inventories. Others, however, appear willing to carry heavier than normal fall inventories into the Christmas season. Much of the strength in department store sales at the present time is centered in sportswear and sporting equipment. Other goods selling well include home furnishings and appliances.
High production levels remain the norm for the manufacturing firms surveyed, but many respondents expect a significant slowing in business next year. Higher materials and labor costs and declining productivity continue to be cited as major problems, but they have not had any visible impact on output. In fact, the District's industrial base continues to expand. An electric utility, for example, reports that there were more new plants and expansions constructed in its service area during the first eight months of this year than for all of last year. Much of the growth is in the electronics, oil field equipment, and auto-related industries. While several large chemical plants are under construction, some plant expansions have been delayed in light of the large amount of new capacity coming on stream.
The boom in oil and gas drilling activity continues in the District, but the current surplus of natural gas in the Texas intrastate market has reduced the number of active rigs in South Texas. The current high level of activity has produced numerous equipment shortages including drill pipe. A major oil field equipment manufacturer reports that a shortage of cobalt used in alloyed steel products is developing.
Industry sources describe production of petrochemicals as "good." One respondent, however, indicated output may have peaked during the second quarter and expects a moderate decline in sales and continued soft prices. Benzene is the only major chemical that is in "extremely" short supply.
Lending activity of District banks appears to have settled back to a moderate rate of expansion compared to the record rates of growth in the first half of the year. With liquidity levels high at most banks, loan officers are becoming more aggressive in seeking out new borrowers. In the face of rising interest rates, however, bankers are particularly eager to make short-term loans. But many expect interest rates to peak in the next few months, and some indicate that they may begin moving into long-term contracts in the near future. Total deposits at most banks continue to grow slowly, although demand deposits declined slightly in conjunction with the September 15 tax payment date.
Mortgage lending by S&Ls remains strong but has backed off from the frantic pace experienced several months ago. A further gradual slowing in mortgage demand is expected. Savings inflows continued to grow at a moderate rate in September, but inflows remained below year-earlier levels. Insurance company and foreign money are reported to be available in large amounts for real estate financing and purchases.
Preliminary findings from our October survey of agribankers indicate that funds available for farm loans are in short supply and that few bankers are actively seeking new agricultural loan accounts. Interest rates for all categories of farm loans have climbed rapidly in recent months with the general rise in interest rates and with expanded demands for feeder cattle and operating loans. Financial conditions in the livestock sector are much improved from a year ago. However, crop farmers are in a much worse position than last year as much needed rains arrived too late to raise yields to normal levels in many areas.