July 1, 1983
The economic recovery in the Eleventh District is strengthening. Increases in consumer and construction spending are leading the recovery. Department store sales are rising, and auto sales are above year-earlier levels. Construction is robust. Manufacturers' shipments have picked up as a result of stranger demand for housing, autos and other consumer goods. Mortgage and construction lending at S&Ls remains strong. Loan growth at commercial banks continues to slow. Banks have shifted to real estate lending partly to offset sluggish business loan demand. Growth in deposits at all financial institutions slowed sharply in May. The District drilling rig count is slowly rising after hitting a low for the year in May. Trends in the agricultural sector are mixed. Rising feed costs are helping grain farmers but are hurting livestock producers.
The pace of construction activity in the District is brisk. Construction of single-family homes and retail shopping space continues to rise. Apartment construction is beginning to slow but the level of activity is still very high. Two-thirds of the permits for residential construction this year have been for apartments. Office space under construction remains strong but the pace of new project announcements is slowing. Increases in retail construction are partly offsetting the slowing in the office sector.
Department store sales increased steadily in May. Respondents are optimistic about consumer spending during the rest of the year. Sales in the hard-hit Gulf and Mexican border regions were up slightly from April's level, but they are still well below the year-ago figure. Consumer durables are selling well, but apparel sales are uneven. Inventories are slightly above planned levels.
New car sales remained steady in May at levels above year-earlier volumes, but shortages of popular models are still curtailing sales. Dealers expect manufacturers' low interest-rate programs and a stronger economy to keep new car sales at current or higher levels. Sales of used cars are sluggish.
Manufacturing production in this District continues to respond to growth from consumer spending. Shipments of electronics, steel, chemicals, and lumber and wood products has picked up in response to increased demand for consumer durable goods, autos, and housing. Manufacturers of lumber and wood products are still rehiring workers. Employment at a number of other manufacturing firms is still declining but reductions are being accomplished mainly through attrition. Most firms are augmenting programs to increase productivity. Respondents expect little increase in wages and prices this year.
S&Ls again report that mortgage and construction lending is strong. Respondents are concerned, however, that interest rates may turn up sharply in the near term. They anticipate that borrowing demand would dry up if mortgage rates go to 14 percent or higher. Most expect mortgage rates to return to the 12- to 13-percent range by year-end. Given this interest rate outlook, efforts to lengthen the average maturity of jumbo CD holdings have been made. Consumer demand for longer-term deposits, however, has declined during the last 30 days.
At District member banks a slight decline in loan growth in May was offset by increased security holdings. Outstanding bank credit was 16 percent above the year-earlier level. Loan growth at large banks slowed in all major categories except real estate lending. Business loan demand remains sluggish and outstanding consumer loans were unchanged. On a year-over-year basis, deposit growth at all financial institutions in this District was 12 percent in May.
The number of drilling rigs operating in the District states turned up slightly in early June after declining in May to its lowest level this year. The outlook is favorable for a pickup in petroleum drilling. Drilling costs are well below historical levels because of excess supplies of equipment. In May, the dollar value of bids for lease sales of drilling sites in the Gulf of Mexico set an all-time high.
Conditions in the agricultural sector are generally improved except for cattle producers. Recent declines in cattle prices coupled with higher feed costs have reduced profits. Texas cattle producers, nevertheless, put more cattle on feed in May than a year ago, because they anticipate lower prices for feed grain later this year. Cotton producers' incomes are rising. Cotton prices moved upward on the strength of the recovery and better export prospects. Corn and sorghum farmers continue to benefit from rising prices, but income gains may be temporary if rising corn prices trigger the release of government-controlled corn reserves.