April 15, 1980
On balance, the economy of the Eleventh District continues to grow, but signs of weakness that portend a recession are cropping up. Department store sales have begun to lag behind the rise in prices, and new car sales continue to decline. The distress in residential construction is reflected in an increase in unsold homes and a rise in bankruptcies among builders. Disintermediation shows little sign of abating at District S&L's. Loan demands at District banks are slowing, but limiting the growth in loans to 9 percent this year will prove to be difficult at most banks. A survey of agribankers shows rapid deterioration of financial conditions in rural areas. In spite of apparent weaknesses elsewhere, industrial production continues to increase, and drilling activity remains at record levels.
Real sales at District department stores have begun to edge down, and much of the weakness is big-ticket items. Retail executives report consumers are becoming increasingly selective in their purchases, and as a result, inventory levels are being tightly controlled. No major changes in the extension of consumer credit are evident as retailers have adopted "wait and see" attitudes toward implementation of the new credit control measures. The volume of delinquent credit accounts shows no sign of increasing.
The trends in new car sales are unchanged from recent months. Sales of small and foreign cars remain fairly strong, while sales of large domestic models continue to slip. Availability of GMAC financing is helping GM sales, but a lack of similar financing is hurting Ford and Chrysler sales. Declining sales and ever higher interest costs are forcing marginal dealers out of business.
The decline in residential construction is beginning to take a toll on builders. The supply of unsold homes is increasing because of declining sales and house prices are softening. Dallas has a four-month supply of unsold homes in the higher price range, and a four-month supply is under construction, based upon sales in February which were slightly below a year earlier. The number of homebuilders declaring bankruptcy is on the rise—particularly in Houston. Further distress will become evident this summer when current commitments run out.
Disintermediation at District S&Ls continues unabated, and loan activity remains depressed. Some mortgage funds are available, but there are few takers at current interest rates. Demand for home improvement loans has picked up slightly, however.
High interest rates have begun to cut into spending programs of an increasing number of municipal governments. Many bond issues and bond elections are being deferred until interest rates drop. Some projects that would normally be financed through bond issues are being funded out of general revenues where such funds are available.
Loan demands at District banks are slowing, although energy and commercial real estate demands remain strong. Growth in loan volumes at Dallas banks is well above the new 9-percent guideline, and most bankers face painful choices for compliance. Elsewhere in the District, the problem may be less severe.
Preliminary results from the April survey of agribankers indicate a rapid deterioration of financial conditions in agriculture. Loan demand at respondent banks is substantially lower than a year ago, and farmers are reported to be delaying purchases and cutting corners wherever possible. Replacement cattle, new farm machinery, and land sales appear to be the most affected. Prices for most agricultural commodities are low relative to production costs, and many of the bankers surveyed are pessimistic about the ability of farmers to repay loans made at current interest rates.
Despite growing signs of weakness elsewhere, factory output continues to increase, and widespread shortages of labor persist. Production in most major industries remains at a high level. However, demand for lumber and construction steel is weakening further, and new orders for office furniture are down because newly completed buildings are being furnished only with essentials due to higher costs. Refinery output continues to decline in light of high inventories of most finished products. Oil field equipment manufacturers report an oversupply of offshore drilling rigs may be developing.
Drilling activity for the year to date is 25 percent above the comparable period a year ago. Demand for inputs remains high. Industry observers indicate it may take a couple of months to determine what effect passage of the windfall profit tax will have on drilling.