May 13, 1981
The economy of the Eleventh District continues to grow moderately. Manufacturing output is rising, and loan volumes at commercial banks are increasing slowly. The strength of nonresidential construction shows no signs of weakening. Department stores sales significantly exceed last year's levels. However, higher interest rates are curtailing mortgage loan demand, and the pace of housing starts is slowing. New car sales were high in the first quarter but have fallen since March. The probability of widespread defaults on agricultural loans is increasing.
Most District department stores are reporting outstanding sales gains for April, which were aided by a late Easter and good weather. Dollar sales for the first four months of the year are 16 percent above year-ago levels, but respondents expect May sales to decline slightly. Most product lines, including appliances and home furnishings, are selling well. Inventories are lean at most stores, and discounts and promotions are at normal levels. Credit sales as a proportion of total sales remain below last year's percentages.
New car sales are down from their March levels. The decline reflects the termination of manufacturers' rebate programs and commercial banks' continued retreat from financing auto purchases. However, dealers expect prospects for bank financing to improve since the Texas usury ceiling was lifted to 24 percent on May 8. The number of used car sales is the same as in the last survey period. Auto inventories may shrink from current levels as respondents do not plan to replace all units sold.
Total loan volume at commercial banks is up from March. Lending to the energy industries and for interim construction financing are the sources of strongest loan demand. The volume of consumer lending is up slightly as borrowers sought to avoid higher interest charges before the increase in the Texas usury ceiling. Bankers report increased competition from money-center banks offering loans priced under prime. Respondents are concerned that medium-sized and small companies without alternative sources of financing will be severely squeezed by higher interest rates.
The growth of deposits at commercial banks is slowing. Savings deposits and NOW accounts are still rising rapidly but at a slower pace than in March.
It is becoming increasingly likely that those banks that make primarily agricultural loans will experience a serious decline in quality of their loan portfolios. A growing number of bankers in the western half of the District, as well as contacts within the Farmers' Home Administration and Federal Intermediate Credit Bank, express concern about the poor financial condition of farmers and ranchers. Heavy borrowers are reportedly having problems servicing their debts and are said to be in desperate need of profitable grain and/or livestock sales. But current prices for major grains and livestock are below average break-even levels in many areas of the District.
Liquidity remains relatively high at S&Ls, even though the pace of deposit outflows is up from March. Restrictive lending policies are being instituted to offset the loss of deposits. Respondents reported that savers withdrew funds for income tax payments and to invest in money market mutual funds. S&L officials anticipate further declines in loans and deposits.
The rate of new housing starts is falling, and no turnaround is anticipated until interest rates decline. Inventories of unsold homes are not exceptional but could cause problems for builders if interest rates continue to rise.
Nonresidential construction remains active because of the continued flow of foreign capital and new firms to the Southwest. Plans to build two 70 story buildings in Dallas were recently announced by a Canadian firm. Local government agencies and construction contractors report builders headquartered in the Midwest are bidding on an increased number of projects in Texas. That development is expected to keep cost increases down. Increases in prices of construction materials are at low to moderate rates.
Manufacturing output continues to expand steadily. Suppliers of nonelectrical machinery and fabricated metals report expanding production and employment, which they attribute primarily to increases in orders from customers in the energy industries. Manufacturers of building materials report no change in new orders, but expect purchases from residential builders to decline. Apparel output is declining slightly and manufacturers expect retailers to place few follow-up orders for this season's merchandise. Due to high carrying costs, manufacturers and wholesale distributors are paring inventories, resulting in longer order lead times but shortages of few products. Materials costs are generally stable or rising moderately.