Beige Book Report: Dallas
March 11, 1980
Economic activity in the Eleventh District continues to expand moderately, although the full impact of the recent increase in interest rates is yet to be felt. Labor markets remain tight. The only areas of significant weakness are related to residential construction and sales of large cars. High interest rates have virtually shut down conventional mortgage lending and interim construction financing. Sales of large cars remain lackluster and department store sales show no improvement after adjusting for inflation. Bank loan demand remains strong, but higher interest rates are expected to squeeze more marginal customers out of credit markets. Manufacturing output continues to trend upward, and oil field activity is especially strong for this time of year. Early spring planting is underway over most of the District.
The impact of the recent hike in interest rates is not yet reflected in the weekly banking statistics, but most survey respondents expect a significant slowdown in borrowing as marginal customers are squeezed out of the market. On balance, commercial loan demand has been strong at District banks, particularly for energy and real estate financing. The strength of the latter is due to prior commitments, and is expected to decline in light of higher interest rates. Although interest rates on most variable rate loans have hit the 18 percent Texas usury ceiling on loans to corporations, most bankers expect to continue to supply working capital to financially sound customers. Total consumer loan demand remains high in spite of decreased availability of funds.
Mortgage loan demand is off sharply due to the prevailing 15 percent conventional mortgage rate and the declining availability of funds. Savings and loan associations are experiencing both disintermediation and transmediation (outflow of passbook savings funds for reinvestment in money market instruments within the same association). Savings balances at credit unions and other financial institutions are declining steadily. Bank customers are foregoing accumulated interest and actively cashing in 6-month CD's prior to maturity and reinvesting in new 6-month CD's at higher rates.
Nonresidential construction continues to be a major source of strength in the Southwest economy, although a few proposed projects have been canceled because of interest costs. Labor and material supplies remain tight due to heavy demand. Residential construction activity has slowed as many small custom builders are unable to secure interim financing, but high-volume builders in Dallas report sales exceeding their expectations.
Current dollar sales at District department stores continue to exceed last year's levels, but show no real increase after adjustment for inflation. Sales are expected to decline through the summer, and department store executives plan to continue their trim inventory levels.
New auto sales are mixed. Demand for foreign and small domestic cars continues strong, while larger car sales drag. Tighter credit policies, such as lower loan limits and shorter repayment periods, continue to eliminate potential customers. Dealers' attempts to hold down inventory costs by limiting the selection of models are reported to be contributing to some loss in sales. Factory output in the District continues to trend upward, although at a reduced rate. Production in many building-related industries has began to decline, but output in other industries continues to expand. The District's only auto assembly plant will resume a double shift at the end of March. The second shift was laid off after last Christmas because of the slump in sales. Profit margins for all manufacturers are being squeezed by rising costs and declining productivity.
Favorable weather conditions continue to boost drilling activity, and the demand for inputs remains strong. Refinery shipments continue despite the Oil, Chemical, and Atomic Workers strike, which by all indications will be lengthy. Some settlements have been made with small refiners, but gaining new agreements with major refiners is proving to be much more difficult. The mild winter has left fuel oil suppliers with high inventory levels of heating oil. As a result, heating oil prices are expected to drop as inventory levels are reduced to make room for the increase in production of summer gasoline stocks.
Warm weather has encouraged early spring planting. Export demand for cotton is greater than previously anticipated since China expects to purchase up to 3 million bales this season. Contracting with growers for 1980 cotton is well advanced.