March 12, 1985
The performance of the Eleventh District economy is flat, but many respondents expect faster growth in the near future. In manufacturing, stable overall sales mask the conflicting effects of declining demand by the energy sector and modestly increasing demand for building materials. Drilling activity is declining as expectations of falling prices persist. Auto sales remain high, but retail sales overall continue to be sluggish. Nonresidential building remains the dominant construction sector.
District manufacturing sales and output show little evidence of overall change, with most respondents reporting that business conditions have remained stable since the start of the year. One reason cited for the lack of significant growth was the unusually cold weather in many parts of the District in January and early February. Manufacturers generally expect orders to increase in the second quarter, and are building inventories in anticipation. Manufacturers have also lately accumulated some inventories involuntarily, as a result of unexpectedly slow sales. The steep decline in the drilling rig count is starting to affect manufacturers of extraction equipment and materials. Respondents report the beginning of a rebound in residential construction and strong nonresidential construction is increasing output in lumber and wood products. Stone, clay and glass production is also being buoyed by vigorous nonresidential construction. Reduced orders of electronics have forced the industry to pare production and inventories. Refining output is advancing slowly. Foreign competition continues to depress demand for District apparel manufacturers. Paper and allied product manufacturers report little change in demand, but respondents expect orders to increase in the second quarter.
The number of active drilling rigs is declining at an increasing rate in the Eleventh District states. This pattern of year-over-year declines has occurred longer in Texas than in either the other Eleventh District states or the U.S. Respondents blame past oil price declines, anticipation of further price reductions, and uncertainty about proposed tax law changes for the slowdown in drilling activity. Production restraint by OPEC has led to a recent firming of oil prices, but this has not appeared to materially change drillers' expectations of further downward pressure on prices ii; the spring. Concern over the price outlook has also reduced the number of rigs in the Gulf of Mexico.
Auto sales remain at the high levels they have consistently attained in recent months. In early February, bad weather slowed sales in some parts of the District, but the strong pace has resumed in recent weeks. Some respondents say that, if import quotas are not renewed, both domestic car sales and import dealers' profit margins may ebb.
Retail sales remained sluggish in February particularly in the large appliance and electronics lines. Respondents expect this pattern to continue. Year-over-year comparisons for the first quarter of 1985 will likely prove particularly bleak since the first quarter a year ago was unexpectedly strong. Retailers plan to keep inventories low to avoid the overstocking that occurred when sales did not meet expectations in late 1984. More have cut employment as a further cost reduction measure.
Residential construction continues to decline at an accelerating rate. December data indicate that both the value of residential construction contracts and the number of building permits fit this description both for the Eleventh District states and for Texas. Permits for multifamily units continue to decline almost twice as fast as those for single family structures. Permit totals do not yet reflect the slight resurgence in activity that respondents indicate.
The value of nonresidential construction contracts rebounded sharply in the fourth quarter of 1984 after slow growth or declines during the rest of last year. The number of projects declined slightly in December, but the number of square feet increased. Lenders report modest increases in construction loans, portending continued strong activity.
Deposit growth at the District's large banks continues to increase, exceeding ten percent on a year-over-year basis for each of the last three months. Deposit growth rates at member banks have been even larger, though not accelerating. Borrowings by large banks have declined slightly in recent months, slowing the rise in total liabilities. Asset growth at these banks is slowing. The exception is the business loans category which grew in January at a faster yearly rate than December.
Agricultural land values declined slightly during the fourth quarter of 1984 when compared with the third quarter. Over the entire year, however, ranch land and nonirrigated cropland did modestly increase in value. Eighteen percent of bankers reported bankruptcies among their farm and ranch customers during the previous six months. These bankers reported that 1.7 percent of their agricultural borrowers underwent bankruptcy. A similar number of banks reported 1.4 percent of their customers were foreclosed during the last half of 1984. These data are little different from the results at the same survey taken a year ago.