May 4, 1987
The District economy remains sluggish overall, but some important sectors are showing signs of renewed strength. Despite flat to declining sales by producers tied to energy and District construction, most manufacturers report slight increases in orders. The drilling rig count has resumed its gradual growth. Construction activity is declining. Retail sales generally remain weak, but auto sales have rebounded from very low levels. The balance sheets of District banks continue to reflect the region's sluggish economy. Product prices for District cotton producers and cattlemen are increasing.
Although District manufacturers report no increases in employment, many say that orders are increasing somewhat. Defense-related manufacturers cite increased military contracts and expect output to be strong for the next two quarters. Producers of steel note expansions in orders and anticipate continued strength through this summer. The falling value of the dollar is said to have contributed to increased sales by chemical producers. Semiconductor manufacturers report a pickup in orders and expect further growth. Sales by manufacturers of construction-related durables continue to decline. Some producers have partially offset these reductions by broadening their markets to include regions outside the District. Orders in the energy-related durable goods industries seem to be bottoming out.
The drilling rig count in the District states resumed its gradual upward movement in March and the first half of April, on a seasonally adjusted basis, after falling slightly in February. Despite the recent weekly increases, drilling activity remains below a year earlier, but year-over-year rates of decline have diminished. Leading indicators of drilling activity suggest that the rig count will continue to edge upward. Texas well permit applications increased substantially in February and the seismic crew count rose modestly in March.
Indicators of construction activity in the District states declined in the first two months of 1987 from the fourth quarter of last year, on a seasonally adjusted basis. The values of residential, nonresidential, and nonbuilding construction contracts all fell appreciably, resulting in a 7-percent decline in total value. Both single-family and multifamily housing permits also dropped considerably over this period. These recent declines contributed to an 28-percent drop in single-family housing permits and a 86 percent drop in multi-family housing permits from the first quarter of 1986. No respondents expect a turnaround in this sector anytime soon.
Retail sales remain slow because of continued weakness in the regional economy. Respondents say that sales in areas of the District more directly dependent on the energy sector have not yet begun to rebound significantly from their very poor performance in 1986. Sales in some less energy-dependent areas of the District are softening. Retailers report paying stable to slightly increasing prices for the products they buy, but competitive pressures are inducing them to lower the selling prices of some goods. Most respondents expect weak sales for the next few months.
District auto dealers report that, although the traditional March upswing in automobile sales has occurred again this year, sales remain below year-earlier levels. Nevertheless, respondents say the sales increase is especially welcome this year because it did not depend on broad incentive programs and because it follows very disappointing volumes in both January and February. Inventories are somewhat high and dealers are not optimistic about sales growth in upcoming months.
The balance sheets of large District banks reflect continued difficulties in the wake of the regional economic downturn. Business and real estate loans are declining, while securities holdings are increasing. Deposits are still falling, led primarily by reductions in large time deposits but also by declining transactions deposits. Borrowings remain far above year-earlier levels. Deposits at thrifts are climbing, but the rates of increase dropped off substantially throughout the first quarter.
Despite lower prices for some commodities, District farm and ranch incomes in 1987 are expected to increase over last year's. Cotton prices have generally increased substantially. Prices for the lower quality cotton that constitutes most District production have risen at particularly high rates. Government programs have reduced the acreage expected to be planted to cotton in Texas by 3 percent, but soil moisture conditions are extremely favorable, so this year's production could be large. Slaughter steer prices have reached $70 a hundredweight up from $55 a year ago, while feed grain costs have declined by about 30 percent over the same period.