May 16, 1979
Directors and businessmen report economic activity in the Eleventh District continues to grow at a moderate and steady pace. Retail sales in real terms are running slightly ahead of a year ago and are expected to remain fairly strong through summer. Loan demand at banks appears to have dipped slightly in recent weeks from the strong level of earlier months, and some bankers anticipate somewhat slower growth in loan volume in coming months. Net deposit inflows to banks and savings and loan associations are up from April but have not recovered to the moderate growth rates that had prevailed in the first quarter. Conventional mortgage lending activity remains depressed mainly by usury ceilings. The Texas legislature is expected to raise the usury ceiling rate following FNMA's reluctance to purchase FHA/VA mortgages that exceeded the state's 10-percent usury ceiling. Manufacturing activity continues to grow steadily, and many industries are near full capacity utilization.
Retail sales are strong with no letup expected through the summer months. Spring auto sales are increasing on the strength of small cars sales and are slightly above the level a year ago. Bad weather and low inventories of small cars are hampering sales at some dealers. A few dealers expressed the desire to keep lower inventory levels because of the rising cost of financing inventories. Department store sales are running slightly ahead of a year earlier in real terms. Retail store executives remain optimistic for the short term, but they anticipate a mild slowing of consumer spending later this year. Inventories are being managed closely and are generally near planned levels.
Gasoline prices continue to increase rapidly with the wholesale price of regular gasoline now selling for 84 cents a gallon in the Houston spot market, up from 70 cents a month ago. No major shortages have developed at the retail level, but many gas stations are closing early on weekdays and all day on Sundays. Most oil companies and refiners in the District do not expect the shortage to become so severe as to warrant rationing. A spokesman for a major oil company said that demand would have to decline 5 percent nationally this summer from a year ago if shortages are to be avoided. The tightest supplies of gasoline are expected in late summer when refiners shift more of their production runs to heating oils.
>Some softening in loan demand is noted by bankers, and a generally slower rate of growth of loan demands is anticipated in coming months. Loans outstanding continue to advance briskly, and the strength is broad based. Bankers continue to report commercial and industrial and real estate loans as particularly strong. Deposit growth has resumed following April's poor showing, but growth rates do not appear to have returned to the levels that existed in the first quarter. Funds continue to be diverted into MMC'S with banks apparently getting a small amount of funds from thrifts.
Net savings inflows at savings and loan associations are returning marginally to the black after many S&Ls experienced losses in April. Personal income tax payments contributed significantly to the losses experienced in April, and the change in the terms offered on MMC's is keeping the expansion of savings below earlier levels. S&Ls have increased substantially their holdings of non-mortgage investments as usury ceilings in Texas discourage lending activity. Mortgage lending is picking up seasonally but remains well below year-earlier levels. Home improvement loans are at historically high levels.
Most mortgage bankers in Texas temporarily halted origination of FHA/VA loans after FNMA expressed concern that the higher interest ceiling on these types of loans might conflict with the state's usury statutes. Although there are laws that exempt FHA/VA loans from the state's usury ceiling, they are untested and may prove to be unconstitutional if adjudicated. Some mortgage bankers have resumed lending at the 10-percent rate but are not charging a one- point origination fee to the borrower. With conventional mortgage lending severely limited by the usury statutes, the state legislature is expected to raise the usury ceiling to a maximum 12 percent on a floating basis tied to the 10-year Treasury bond rate.
Industrial output continues to expand at a moderate rate from an already high level. Capacity utilization generally remains high, and many industries report rising backlogs of unfilled orders. Recently, however, a major producer of drilling equipment announced plans to reduce output and lay off workers because of the industry-wide slowdown.
Manufacturing activity for firms producing consumer products appears to be improving after a sluggish first quarter. Apparel manufacturers report improving sales levels, although capacity utilization remains low for most firms. Much higher prices for synthetic yard goods and lengthening delivery times for material inputs are reported. Furniture manufacturers have a mixed outlook and are faced with higher lumber prices and, in some cases, difficulty in securing certain types of lumber. Manufacturers of home appliances report increased dealer orders, but sales to new home developments are down.
Consumers and businessmen express little optimism that inflation will soon ease. Although a few retailers report some inflation-induced sales, the large majority of retailers see a reduction in sales volumes as consumers' real incomes decline. Inventory building by manufacturers as an inflation hedge appears minimal. Many manufacturers have implemented cost-cutting measures, but low productivity caused by declining labor quality and near full capacity utilization is offsetting cost-cutting efforts.