December 5, 1984
The Eleventh District's economic expansion remains sluggish across a broad spectrum. Demand for manufactured goods continues to grow slowly. Oil and gas drilling is increasing as is normal for this time of year, but lower crude oil prices could dampen this activity. Retail sales have fallen far short of expectations. Auto sales continue their strong showing. The level of residential construction is continuing to decline as fears of overbuilding now affect single family construction. Nonresidential building is steady, but rising vacancy rates are beginning to deter construction.
District manufacturing growth remains low. Areas of strength are the paper and allied products and electrical machinery sectors which continue to show consistent growth. Transportation equipment manufacturers are reporting increasing demand from utilities and oilfield service companies. Apparel manufacturers, on the other hand, continue to experience low demand as a result of import competition and sluggish retail sales. Sales in the chemical and allied product sector are increasing only modestly. Lumber and wood products and stone, clay and glass producers are experiencing slow sales growth, except in Houston where weak construction activity has curtailed demand for these materials. Rising inventories and stiff competition are keeping prices low relative to costs. Primary metals, fabricated metals, and nonelectrical machinery manufacturers report slight increases in demand from energy firms, which are still restocking inventories, but little demand growth elsewhere. Refinery employment fell for the seventh straight month.
October drilling activity increased in District states, with the rig count rising slightly and remaining above last year's level. Some respondents report that despite the decline in oil prices, drilling should increase, following the normal seasonal trend at year-end. However, the drop in oil prices has lowered lenders' valuations of reserves used as collateral. This may reduce the availability of funds for drilling, and thus the extent of any upturn.
Retail sales are showing surprising weakness. Some respondents report that sales are down significantly on a year-over-year basis; for many this represents the first decline in this recovery. The weakness is widespread, affecting all product lines.
The normal seasonal downturn in auto sales continues, but sales are still above last year's level. The strike of Canadian auto workers led to increased availability problems, worsening the inventory shortage that has plagued dealers. Delivery of 1985 models and the strike settlement are beginning to ease inventory problems.
Residential construction continues to slow throughout the District. Both single-family and multifamily permits reached lows for the year and they are below last year's third quarter level. Overbuilding, long a concern in the multifamily market, now is also dampening single family construction. Some lenders have reported that the recent decline in interest rates has led to a slight increase in loan activity. This may lead to some resurgence in construction.
The value of nonresidential construction in the District is holding steady, although the number of projects is up significantly. This reflects strength in light office and warehouse construction. Some office and commercial projects are being developed, but overbuilding has resulted in a generally weak market for new projects. Previously strong markets such as Dallas are showing signs of slowing, although San Antonio and Austin are still strong.
Monthly deposit growth at the District's member banks is declining slightly, although recent year-over-year growth rates remain well above the averages for the first three quarters of 1984. At large banks, the recent pattern of absolute monthly declines in deposits is continuing and year-over-year growth rates are slowing significantly. Borrowings by large banks have declined substantially, but remain high in comparison to two years ago. Large bank asset growth is slowing. Year-over-year growth rates in business, consumer and real estate loans continue to decline, with the largest reduction coming in consumer loans. While large bank real estate loan growth remains very high on a year-over-year basis, real estate loans have remained virtually unchanged since late in the summer. Respondents continue to report that a significant portion of real estate lending is for projects outside the District.
Texas cattle and sheep producers are gaining from high seasonal prices, despite an increase in drought-induced production costs. Stable prices and costs, along with increased production, should improve crop producers net cash receipts. Because of herd liquidations, dairy program cutbacks and problems associated with the drought conditions of last summer and early fall, Texas beef producers marketed 25 percent more fed cattle in October than a year earlier.