May 6, 1985
Economic growth in the Eleventh District remains slow. Respondents in manufacturing report modest gains in demand. Drilling activity is dropping farther below year-earlier levels. Auto sales continue to grow briskly, but only modest gains are expected as the year progresses. Retail sales are below levels of a year ago. Loan growth at District banks is slowing. District farmers face declining crop and livestock prices.
Eleventh District manufacturing is expanding, but very sluggishly. Respondents in most sectors report modest gains in demand, but few foresee rapid growth in the near future. There is wide geographic divergence in the performance of some building-related manufacturing industries such as stone, clay and glass and lumber and wood products. Only firms in areas where construction is least depressed have managed to increase sales. Fabricated metal producers, however, report somewhat greater demand from building contractors engaged in public works construction. The depressed energy sector has dampened growth in nonelectrical machinery manufacturing. Makers of electrical machinery and equipment continue to report sluggish demand, but their prospects are brighter because firms in a broad spectrum of industries report plans to invest in productivity-enhancing, automation-oriented equipment this year. Chemical makers report flat sales, while paper and allied product manufacturers note some renewed strength in demand. Primary metal manufacturers still observe that import competition is hindering sales.
The number of active drilling rigs in the Eleventh District states is responding more acutely to declining oil prices. Year-over-year declines in the seasonally adjusted rig count accelerated to almost 10 percent in March. The weakness in drilling reflects the pessimistic attitude about prices and uncertainty about tax changes on the part of many energy companies. The number of well permit applications and the seismic crew count, both of which are leading indicators of drilling, evidence this pessimism. Both measures declined sharply in March from one year earlier.
Auto sales have maintained their record pace in March, but some slowing is expected for the next couple of months. Modest shortages of large domestic cars are developing, but overall inventory levels remain steady. The removal of import quotas on Japanese cars will intensify price competition. Its full effect is not expected to be felt until late in the third quarter, however.
Retail sales remain below 1984 levels and are expected to remain sluggish in the near future. Consumers seem to be holding back expenditures because of slower income gains and subdued consumer confidence. Fashion lines are selling well, but big-ticket items are doing poorly. Profit margins remain below last year's level, but prices are not expected to increase. Reductions in employment levels are a prevalent cost-cutting measure among respondents.
After a strong gain in the fourth quarter of 1984, nonresidential construction has fallen off in the first quarter of 1985. The seasonally adjusted average monthly value of nonresidential constriction contracts for the first quarter of 1985 was 15.6 percent below the level for the previous quarter for the Eleventh District states and 13.0 percent below for Texas. Evidence of the oversupply of commercial office space has become more apparent in recent months, contributing to the decline. Nevertheless, nonresidential contract value in the first quarter was significantly above its level one year earlier.
The value of residential construction contracts has declined at increasing year-over-year rates for the last four quarters in the District states. In Texas, first quarter residential contract value was more than 30 percent below its level one year earlier. Housing permits also continue to slide, falling in March 36.8 percent from their level one year before. The number of multifamily permits continues to decline at a greater rate than single family permits. March multifamily permits for Texas were 43.6 percent below their quarterly average one year earlier, compared to a 28.3 percent decline in the single family level.
Growth in total deposits at District member banks increased slightly in March after a substantial gain in the rate of increase for February. The March growth rate of 16.0 percent matched the increase in deposits at large banks. Although total loans at District large banks are expanding, the rates of increase are declining, and business loans at these institutions have actually fallen in the last two months. Both real estate loan growth at large banks and construction lending increases at Texas savings and loan associations, though still strong, have slowed in recent months.
Eleventh District agriculture is having a weak spring. Crop and livestock prices are significantly below last year and continue to decline. Despite lower product prices, cropland values have risen, on average, in Texas, instead of falling as they have in midwestern states such as Iowa. As a result, farm bankruptcy rates in Texas are much lower than in the Midwest. The income of state ranchers in 1985 is likely to drop from last year's levels because any price increases are likely to be only temporary.