June 25, 1985
The economic expansion in the Eleventh District remains slow. Manufacturing respondents, overall, report little change in output. The rate of decline in drilling activity is accelerating. Auto sales have slipped below last year's spectacular performance, but remain quite strong. Retail sales are expanding less vigorously than a year earlier. Nonresidential construction maintains its pattern of strong increases, while residential construction is in decline. Loan growth at District banks continues to slow overall. Agricultural production is expected to equal record levels, but prices are sharply lower than last year.
Demand growth for District manufacturing firms remain modest, but respondents have lately become more optimistic about the prospects for future expansion. The recent mild resurgence in overall construction activity has boosted purchases of lumber and wood products and primary and fabricated metals. Nonelectrical machinery manufacturers, especially those serving the energy industry, report slack demand. Sales of electrical machinery are sluggish and inventories in the industry are undesirably high. Paper and allied products makers complain of weakness in their markets and say it is because of import competition and ebbing general economic activity. Apparel firms report that their customers are buying substantially more than in the recent past. Refiners have been expanding output and accumulating inventories in expectation of the usual summer increase in demand.
The number of active drilling rigs in the Eleventh District states continues to slide, in part, because of currently weak energy prices and of expected price reductions. Another reason cited for falling rig usage is that some firms find takeover activity offers a higher rate of return than does exploration and development. Respondents say that some firms have taken funds formerly committed to drilling and exploration and redirected them to takeover-related expenditures.
While retail sales growth is sluggish overall, spending for some lines remains strong. Consumer purchases of apparel are climbing at a particularly rapid rate. Demand for durable goods is low, however. Many respondents expect further deceleration of overall sales expansion. Retailers indicate that they are monitoring inventories with unusual caution. Some stores are now contemplating employment reductions.
Auto sales remain brisk, although they are down slightly from last year's exceptionally strong levels. Dealers report that they are optimistic about the future, as a result of recent declines in interest rates and of indications that the demand for high-priced luxury and sports models will remain unabated. Their optimism is tempered by concerns that overall economic conditions may weaken.
Nonresidential construction activity in the District continues to advance very substantially, despite increasing vacancy rates, rent discounting, and other evidence of overbuilding. Both non- residential building and nonbuilding construction contracts are growing rapidly. Contracts for streets and roads are expanding at a particularly high rate.
The value of residential construction contracts continues to slip from its year-earlier level, but the rate of reduction has slowed. The number of building permits also continues to fall. Multifamily permits have accounted for the bulk of recent declines.
At District large banks and Texas savings and loans, growth in assets and liabilities has lately decreased somewhat. At large District banks, the pace of expansion in total loans and securities subsided during the first quarter and again in May. Business loan volume has been falling absolutely since March. The pace of real estate loan lending has been slipping lately, but it still remains very high. At Texas savings and loans, both mortgage and construction loans have been expanding at rapid rates. Large banks are funding their asset growth primarily with increases. in large time deposits and MMDAs. Both categories have been registering strong year-over-year gains. Borrowings at large banks have been declining since the fourth quarter of last year. Asset expansion at S&Ls has been funded chiefly by large increases in Jumbo CDs, other time deposits and borrowings.
Eleventh District agricultural production is surging because of good weather. Winter wheat yields are likely to match record levels. Increased world crop output, however, has led to significant declines in crop prices from its year-earlier level. Livestock prices have also declined over the last year, although somewhat less than crop prices. Texas cattlemen continue to liquidate their herds. In April, placements on feed were the lowest for that month since 1982 and the number of Texas cattle slaughtered was the highest April total in many years. Overall, Texas farm income is expected to be lower this year than in 1984.