March 20, 1986
The District economy continues a slow expansion, although the recovery is threatened by the recent precipitous drop in oil prices. Oil and gas drilling is declining rapidly. Sales by manufacturers are slipping, overall, but demand has expanded in a number of industries. The value of construction contracts is falling. Retail sales growth has been modest and auto sales have declined. The rate of loan growth at large District banks is ebbing. Prices for District agricultural commodities are falling.
District manufacturers report mixed conditions, but declining orders from the construction and energy sectors have caused overall demand to fall. Sales by primary and fabricated metals producers are shrinking because of reduced orders from construction and energy- related firms. Although a slowdown in District construction has led to reduced sales by manufacturers of lumber and wood products and stone, clay, and glass, construction demand outside the District has dampened the decline. The fall in the dollar has allowed domestic producers of electronics, glass, and apparel to compete more effectively against foreign producers and sales have expanded in those industries. Electronics and transportation equipment producers continue to benefit from increasing defense contracts, but respondents report increased uncertainty about future growth in orders. Increased world production of crude oil has expanded output at District refineries. Chemical firms, however, have not yet observed lower prices for petroleum-based inputs.
Construction activity is declining in response to rising vacancy rates and to uncertainty over the economic outlook for the District. The largest drop has been in nonresidential construction, but residential building is also declining. The value of nonbuilding construction contracts, including those for streets and highways, continues to grow rapidly.
District energy exploration, drilling, and extraction activities are on the decline. In January, the District drilling rig count was 30 percent below the already-depressed level of a year earlier. Drilling permits, a leading indicator of drilling activity, had shown evidence of reaching a floor, but the recent hard fall in oil prices has led to expectations of additional reductions. Another leading indicator of drilling activity, the seismic crew count, has been dropping steadily.
Retail sales continue to expand at a slow pace. Rates of increase vary widely across the District. Sales in energy-dominated regions are rising less than in other areas. The strongest retail sales growth is taking place in apparel and fashion lines. Sales of consumer durables are weak, partly because of their close link to housing sales, which have been declining in the District. Retail respondents report that they are trying to hold their inventory-to- sales ratios at very low levels.
After several years of brisk auto sales respondents are reporting declines in sales. The largest reductions are in the energy- dominated portions of the District. Inventories are rising to undesired levels and price competition has intensified. Although some popular models are in short supply, the overall availability of automobiles is greater than at any time in the last two years.
At the District's large banks, growth in total loans increased slightly in January, compared to last year's fourth quarter pace. The year-over-year rate of expansion, however, remains considerably below the average gains during the first three quarters of 1985. The volume of business loans fell absolutely. Real estate loan growth has slowed considerably and has remained in the single-digit range for several months. Consumer lending booked at District banks is growing at a healthy rate. Deposit expansion at these institutions has slowed considerably and total borrowings continue to fall below year-earlier levels. At thrifts, deposit growth was 23.3 percent in January, compared with 28.1 percent in the fourth quarter of 1985 and with rates in excess of 30 percent in the two previous quarters.
In District agriculture, the average level of crop prices in January was unchanged from a year earlier, but livestock prices were down 9 percent. Total marketings of fed cattle were also reduced, resulting in a decline in income for producers. Expectations of future declines in grain prices are widespread.