October 23, 1985
The Eleventh District economy remains sluggish. Manufacturing activity is flat. Drilling remains depressed with little hope of a resurgence owing to price instability. Retail sales are showing little growth. Auto sales are extremely brisk. Evidence of a decline in nonresidential construction is becoming apparent, but lower interest rates continue to fuel a mild recovery in residential construction. Asset growth is largely unchanged at the District's large banks. The agricultural sector continues to deteriorate owing to low cotton and beef prices.
Eleventh District manufacturing is maintaining its weak overall performance, but more firms report increasing sales than in earlier surveys this year. Apparel manufacturers say their orders have begun to increase on a year-over-year basis after a period of slack demand earlier in 1985. Manufacturers of primary metals report rising demand from the refining industry, and brisk sales to construction firms working on public works projects. Nonelectrical machinery producers note that sales of oilfield machinery are ebbing but that demand for food-processing equipment remains very strong. Chemical and allied products firms report that the general slump in manufacturing activity is keeping sales flat. Manufacturers of lumber and wood products and firms making stone, clay and glass goods attribute lower absolute sales levels to moderating construction activity. According to respondents among electric and electronic equipment manufacturers, sustained high inventories of electrical components continue to depress sales of semiconductors.
Drilling activity in the Eleventh District is still declining in what respondents say is a reaction to earlier declines in oil prices and uncertainty over future prices. The rig count in Texas has recently fallen below 700 for the first time since 1976. Leading indicators of drilling activity, such as well permits and the seismic crew count, suggest that the current depressed level of drilling should persist.
Retail sales growth is slight. The weakest sales items continue to be large appliances and other household goods, although an increase in home sales is expected to reverse this trend. Apparel and accessories are selling well, however. Retailers report optimism that renewed economic expansion will accelerate sales expansion in the future. In the meantime, employment gains in September were largely attributable to the beginning of Sunday sales in Texas.
Concessionary financing terms from manufacturers are keeping auto sales quite brisk. Inadequate inventories of desired models are hurting some dealers. Although many respondents report optimism about future sales, some are concerned that sales will slow significantly with the end of the special financing programs.
Nonresidential construction is slowing, although the level is still quite strong. For the three-month period ending in July 1985 the total value of construction contracts in the District states was somewhat below the three-month period ending in April. The decline in Texas was sharper than elsewhere in the District. Respondents expect the slowing to continue and other as evidence a growing number of cancelled and deferred projects.
A slight resurgence in residential construction is occurring. The average monthly permit totals during the three-month period ending in July were 6 percent higher than for the previous three-month period. Despite the recovery, the number of permits is significantly below last year's level. The number of multifamily permits is holding steady after a long period of decline.
Growth of total loans and securities at the District's large banks slid in August from July, but increases were about the same as the average pace for the second quarter. Loan expansion decelerated markedly, while the rate of increase in securities rose. Consumer lending at large banks fell absolutely from July to August, in response to the relatively low interest rates introduced by automobile manufacturers. The year-over-year growth in real estate lending continued to slow, but remained strong overall. According to lenders, refinancings of existing projects predominate over loans for new projects. The demand for energy loans is increasing as lower prices restrict the cash flow of energy companies. Respondents note, however, that stricter lending criteria are preventing many applicants from qualifying for additional loans. At all member banks, including large banks, total deposit growth has been very steady.
Estimates of District agricultural income continue to drift downward as the revenue outlook for cotton farmers and cattle ranchers deteriorates. Prices for sorghum, wheat, rice, soybeans, cotton and cattle are all below the levels of a year ago. Cotton and cattle generate about 60 percent of District cash receipts to farmers and ranchers.