August 6, 1984
The Eleventh District's economic recovery continues strong, although there is some evidence of slowing. A broad spectrum of the District's manufacturers report increasing demand. The energy sector's slow upturn continued. Auto and retail sales remain brisk. Despite rising interest rates and earlier declines in permits, the level of residential and non-residential construction is still high. Drought is a major problem for central and southwest Texas farmers and ranchers.
District manufacturing growth remains moderate but steady. Despite rising rates of capacity utilization in a number of industries, there is little evidence of widespread plans for investment in additional capacity. Inventories continue to be tightly managed. Some respondents report price increases in raw materials. The demand for construction-related goods remains very strong and has stimulated the production of concrete, brick, lumber, and other building products. Foreign competition is keeping lumber prices and profits low. Concern over the possibility of mill closings among less efficient producers has surfaced. District pulp and paper plants are operating near full capacity and product shortages are expected. Defense spending for high-technology systems has led to increased electronic equipment production. Orders of machinery for the energy industry are rising, after a long period of decline. Chemical and allied products demand is increasing only modestly overall, although the market for specialty chemicals used in medicine and in the electronics industry is very high.
The number of active drilling rigs dropped slightly in early July, but the number was still 20 percent above the year-earlier level. The seismic crew count and the number of well permits issued, both leading indicators of drilling activity, continue to show an irregular pattern of modest increases. The Gulf of Mexico offshore rig count reached the highest level ever. Inventories of a number of drilling-related manufactured goods are falling to desired levels. Rising demand for these products, together with declining inventories, has led to employment increases in oilfield equipment manufacturing. Nevertheless. recent declines in oil prices have raised concerns over the sustainability of the energy recovery.
After a record-breaking May, auto sales in June registered a smaller increase over last year's level than in previous months. Sales rebounded in July, but respondents attribute some of this resurgence to fears of an autoworker strike this fall. Shortages of popular models were heightened by the end of production of l984 models. Respondents said increased financing costs have not noticeably affected buyers' attitudes.
Retail sales are still rising, but some respondents report that year-over-year increases have begun to slow. Consumer durables, a strong contributor to sales earlier in the year, are no longer outpacing other categories.
Residential Construction continues to show evidence of slowing. The number of permits increased in May, but second quarter 1984 totals are about 10 percent below the year-earlier level. In some markets, overbuilding has contributed to the slowdown. Savings and loan officials report that higher interest rates have reduced the demand for mortgage loans. Even so, most respondents expressed optimism that the level of residential construction would remain high.
The level of office and commercial construction is strong, as gains in May and June offset weakness in April. The value of permits for the second quarter of 1984 about equals the year-earlier level, but respondents report that concerns about overbuilding and higher interest rates have prompted caution among builders and lenders.
Loan growth at large District banks remained steady, with business and consumer loans showing larger year-over-year gains. Growth in real estate loans at these banks has ebbed somewhat, but it continues at a very fast pace. Total deposits have lately increased owing to significant growth in time deposits. Conditions at Texas S&Ls mirrored this asset and deposit growth, but year-over-year gains in loan volume are slowing.
Drought continues to affect central and southwest Texas farming and ranching. Cattlemen are continuing to liquidate their herds. The drought has also reduced income prospects for District feed grain producers. In spite of these problems, low levels of bankruptcies and problem loans are reported by agricultural lenders.