October 14, 1980
Economic recovery in the Eleventh District is slowing as a result of higher interest rates. Residential construction is most affected, but a growing number of firms are altering business decisions in light of higher rates. Department store sales are growing slowly, while new car sales show little improvement. Nonresidential construction remains active, but some plans for future projects are fading. Factory output is mixed, as is the demand for labor. Growth of total bank loans is tapering off although C&I loans continue to expand rapidly. Many farmers are unable to pay back production loans. S&Ls report strong demands for available mortgage funds, and deposits are increasing.
Department store sales are recovering slowly, according to survey respondents. Soft goods, particularly clothing, are showing relatively more strength than consumer durables. Retailers are optimistic regarding Christmas sales. Retail inventories are in line with sales expectations.
New car sales continue to run about the level a month ago, and dealers fear sharply higher sticker prices on the 1981 models will depress sales further. Trucks are outselling cars in some areas, and respondents indicate demand for used cars is on the increase. Dealers are trying to hold down stocks of new cars because the recent rise in interest rates has added significantly to inventory costs. Good used cars are generally in short supply.
Demand for housing continues to grow rapidly as indicated by a persistent rise in prices, but high interest rates have slowed the recovery in residential construction. Current sales reflect the number of people moving into the District and to a smaller degree purchasers who had commitments before interest rates rose. The slowdown in homebuilding is causing a modest buildup in inventories of unsold houses for some builders.
Nonresidential construction activity remains robust, especially in the large urban areas. But higher interest rates and the long-run outlook for inflation are dampening future construction plans. Financing is difficult to arrange from domestic sources. In addition to interest on their loans, a growing number of lenders want a percentage of the rents or an equity share of the ventures in which they participate. Foreign funds are readily available, with investors willing to provide high proportions of equity and with returns on investments as low as 7 percent before taxes. Financing by the Federal Government is being reduced for such projects as highway construction.
Manufacturing output remains mixed, and rising costs are cutting profit margins. High inventory levels of finished goods continue to depress production in refining and chemicals. Output of most building materials has leveled off, but a maker of fiberglass insulation is running at full production to rebuild inventories that were depleted during the summer heat wave. Lumber production is down, and prices of 2x4s, particle board, and wallboard are off significantly from a year ago. Demand for steel products continues to grow apace of commercial building, power plant construction, and the boom in oil field activities. Electronics firms reported a brief slowdown in shipments, but an acceleration in defense spending is offsetting a softening in consumer demand.
Current labor market conditions reflect the mix of economic activity in the District. Unemployment is rising among construction workers, while growth of manufacturing employment is abating. Still, many employers report shortages of skilled workers in a broad range of occupations. The growth in volume of bank loans is slowing, largely as a result of the increase in interest rates. Consumer borrowing, especially mortgage loans, is down sharply. Many banks are reluctant to make auto loans as business loans are more profitable. C&I loans continue to expand. Much of the strength is related to oil and gas activities, but loans are up in many manufacturing industries. Total deposits are increasing at District banks with demand deposits outpacing time deposits.
Preliminary results of our quarterly survey of agricultural credit conditions indicate the rate of loan repayment is slower than usual. Severe drought conditions caused significant, widespread declines in crop yields, and in some cases crop abandonments. As a result, an unusually large number of farmers are unable to repay production loans as scheduled. Bankers also report many young farmers with high debt/equity positions may not be able to withstand the drop in income caused by this year's crop failure. Government credit agencies have been actively making emergency loans.
Deposit growth is strengthening at S&Ls. Mortgage loan rates are reported as high as 14 1/2 percent plus two points. S&Ls report profits are being squeezed by the high cost of funds, but the situation has eased somewhat by the rollover of certificate accounts originated in the first quarter. Mortgage loan demands are strongest in large urban areas, and 80 percent of all loan applications are by buyers moving into the Southwest. Delinquencies remain at a low level.