September 8, 1987
The District economy is rowing very slowly. Manufacturing activity is stable or increasing in most industries. Drilling continues to turn up. Construction values have been showing gains. Retail sales remain fairly fiat, but some respondents note increases. There has been essentially no deposit growth at the commercial banks in the Eleventh District during the last three quarters. Farm prices are up from a year earlier and agricultural credit conditions are improving.
District manufacturers indicate that, overall, business conditions have improved very modestly in recent months. Orders to apparel producers have increased significantly, as retailers have begun to shift from foreign to domestic suppliers. Refiners note that their output remains strong, but that profit margins are slim. Chemical manufacturers say that orders to them are strong, considering normal seasonal weakness, and express a favorable outlook for the coming months. Sales by electrical and electronic equipment manufacturers have been fairly stable in recent months and remain above a year earlier. Defense contractors say output and prospects for new orders remain strong. Sales by producers of energy-related durable goods have lately remained unchanged, despite continued increases in drilling activity. Some manufacturers of durable goods tied to the construction industry report that orders are stabilizing at very low levels, while others report additional declines.
The District drilling rig count continues to climb. The rig count rose in July and held steady in the first half of August. Well permit applications, a leading indicator of drilling activity, also increased in July. Energy industry observers say that recent increases in drilling were not based on this summer's runup in oil prices and that the price declines in August are unlikely to induce drilling declines.
Indicators of District construction activity have lately shown gains. For the three months ended in July, the value of construction contracts was up 10.0 percent from the first quarter. This expansion represents an increase from low levels, however, and contracts have grown only slightly over the depressed levels of a year earlier. These increases have occurred despite continued reductions in nonresidential building. The strength in contracts has been focused In non-building construction, a category that includes sewer and water lines and streets and roads. Residential contracts have also shown some growth over the last few months but remain below a year earlier. Nevertheless, both single-family and multifamily building permits have been declining lately. Construction employment is continuing to drop in response to past reductions in contracting.
District retailers report flat to slightly increased sales. Sales of home furnishings and of some appliances have picked up, after a protracted period of weakness. This increase is ascribed to growth in the proportion of homebuyers who are purchasing a residence for the first time. Sales of consumer electronics continue to fall, however, in response to rising prices tied to the declining value of the dollar. Most retailers expressed optimism about third quarter sales.
District auto sales are up in response to interest rate incentives offered by domestic manufacturers. Dealers say that domestic auto sales are also up because prices of domestic models have remained unchanged, while prices of foreign cars continued to climb. Concerns are widespread that sales may slow substantially after the financing incentives lapse at the end of September.
Conditions at the District's financial institutions continue to be sluggish. The deposit growth rate at thrift institutions continued to slow in July but remained positive. Regulatory capital at Texas thrifts decline from a positive $3.4 billion In May 1986 to a negative $2.1 billion in May 1987. There has been virtually no deposit expansion at District commercial banks during the last three quarters. In July, deposits were 1.7 percent lower than a year earlier. Large time deposits at District commercial banks are declining at an increasing rate, but these reductions are being partially offset by increases in small time deposits. The legalization of limited branch banking in Texas in 1986 has led to reductions in the number of banks. The decline primarily represents mergers of subsidiary banks of multibank holding companies into a single bank with a branch network.
In District agriculture, product prices are substantially above a year earlier and farm credit problems are diminishing. Profit margins in livestock operations are wide, as a result of low feed prices and increased livestock prices. Reduced output by foreign producers, together with renewed consumer demand for cotton products, has put upward pressure on cotton prices. A warm September will be needed to protect the West Texas cotton crop, much of which was replanted in June after heavy rains and hail destroyed previous seedings. In July 1987, prices of all major District crops were above a year earlier, with the exception of potato prices. For the same period, prices for all components of the Texas Livestock and Livestock Products Index were above a year earlier, with the exceptions of broilers and eggs.