December 13, 1978
Department store sales are stronger than forecast earlier and are expected to top the record level of Christmas sales last year by a margin comparable to the average rise in prices. Much of the current strength in sales may be due to price markdowns and promotions to run off heavy inventory levels at many stores. Department store executives warn that consumer spending may weaken considerably with continued erosion in purchasing power and mounting burden of consumer debt. Slower year-over-year sales gains are expected in 1979.
Domestic auto sales are running at the same level as a year ago, and inventories are tight. Sales of recreational vehicles are particularly strong, and according to one AMC dealer, some dealers are haggling for the available supply of Jeeps. Foreign car dealers report inventories have expanded to desired levels, and sales are running well ahead of a year earlier. Most auto dealers note price resistance from buyers, and sales of used cars and parts have been growing since the new model year began.
A slowing of auto loans and other types of consumer credit is reported by District bankers. Commercial lending remains strong, however, and apparently reflects a "better to expand now than wait" attitude among businessmen. A major Dallas bank recently adopted a lower-than-prime rate for small businesses. Deposits continue to rise with much of the strength coming from money market certificates at small banks and large CD's at larger banks. Liquidity generally remains adequate, but a few small banks report shortages of loanable funds. Weather-induced delays in the harvesting of cotton have delayed payoffs at many country banks.
Terms on mortgage loans have been tightened recently by District S&Ls. Typically, 25-percent down payments and loan limits have been imposed. Savings inflows have not slowed appreciably, but the cost of funds continues to rise relative to the prevailing 9 7/8-percent mortgage rate, plus three to five points (one to the buyer and the remainder to the seller). Mortgage demand is slowing under the current mortgage terms, and additional funds are becoming available for alternative investments such as commercial paper, bank CD's, and out-of-state mortgages, particularly California. As long as alternative investments remain profitable, S&Ls are expected to continue issuing money market certificates. A few small S&Ls, however, are placing restrictions on their money market certificates, such as eliminating the .25-percent premium over the six-month Treasury bill rate. S&Ls anticipate no problem in rolling over money market certificates as they mature and estimate 85 percent will be rolled over.
The tight mortgage market and expensive interim construction financing are slowing housing starts. Weakness is already noted in the higher-priced homes in Houston, and the multifamily housing market in that city is said to be overbuilt as evidenced by a recent decline in starts. Similar conditions exist throughout most of the District, with most industry spokesmen predicting a continued decline in starts through mid-1979. Because of the slowing in sales, inventories of new houses have risen but remain at levels that builders consider manageable.
A major Southwest cement producer, while predicting a recession for the national economy, sees his business next year little changed from this year. What loss there may be from the residential sector is expected to be made up by gains in nonresidential construction. Cement, sheet rock, and brick continue in short supply, although the slowdown in construction activity is temporarily easing the shortages.
Most apparel firms report only moderate gains in new orders. One area of significant strength is among uniform manufacturers. The new minimum wage is expected to add 6 to 8 percent to the cost of production according to some estimates. Weak product demand, however, will keep the manufacturers from passing on the full wage increase, and price increases are expected to meet Carter's anti-inflation guidelines.
The current pinch in the supply of unleaded gasoline was caused largely by higher than expected demand and refinery outages due to maintenance and fire. Prices of all grades of gasoline, however, are headed up. Refiners are well along on their winter heating oil runs but will begin shifting their product mix for next summer's gasoline demand next month.