May 4, 1988
The Eleventh District economy is recovering modestly. Manufacturing continues to expand overall, but weaknesses in some industries are partially offsetting strengths in others. Despite recent increases in retail sales due to the Easter season, retailers remain pessimistic that these gains are sustainable. Auto dealers, on the other hand, are quite confident that sales will continue to be strong. Construction continues to be a drag on the region's economy. Although District farmers and ranchers anticipate relatively high incomes for 1988, they expect a slight decline from the levels of 1987. Deposits at District banks remain below year-earlier levels, while thrift deposits are expanding.
Most District manufacturers are optimistic that sales will continue to grow during 1988. Notable exceptions are in the construction- related and apparel industries. Respondents in these categories report that inventories are higher than desired and that sales are down. Manufacturers of oil field machinery and equipment portray their sales as above a year earlier, but still not strong. Petroleum refiners and chemical manufacturers say that they expect sales to continue to grow moderately while steel producers foresee increasing demand. Electrical and electronic equipment producers report rising orders. Orders for food and kindred products are expanding slightly and producers expect only small improvements in 1988.
Drilling rebounded sharply in the District states in March, renewing the strong year-over-year gains achieved in the last half of 1987. The March gain was concentrated in Texas, where the rig count increased for the first time in six months. Recent increases in oil prices are said to portend further gains in the rig count, thereby maintaining the yearly growth in this indicator. The seismic crew count, a leading indicator of drilling, showed renewed strength in early 1988, confirming the prospects for sustained modest growth in energy industry activity.
March retail sales were substantially stronger compared to year-ago levels, but retailers attribute this to an earlier Easter season. Optimism is being tempered by preliminary reports of declines in the first half of April. Despite aggressive markdowns, inventories are said to remain above desired levels.
District automobile dealers report that first-quarter sales increased significantly from a year earlier. Domestic sales are very strong, but imports are growing more slowly than during the past few years. Prices are holding steady. Dealers are optimistic that the second quarter will show further growth, provided the District economy continues to expand overall, and they expect sales in 1988 to be much higher than in 1987.
District construction activity continued its decline with little evidence of recovery in the near future. Despite February increases in residential and nonresidential contracts, which were concentrated in Texas, total contract values declined because nonbuilding construction contracts dropped sharply. Likewise, the number of residential building permits remains low. Nevertheless, a sharp February rise in single family permits offset another decline in multifamily issuance to increase total permits. Construction employment in Texas has reached its lowest level in over ten years.
District farmers and ranchers are still anticipating relatively high incomes in comparison with recent years although they do expect income in 1988 to fall below 1987 levels. Recent surveys indicate that in most areas of the District the number of farmers and ranchers leaving agriculture was down almost one-third in 1987 compared with 1986. Adjustments continue as more high-cost farms brought into production during the farm boom of the 1970's are unable to compete in the climate of the 1980's. Prices for crops and livestock are up over a year ago, but crop prices have fallen from February's levels.
Although deposits at District financial institutions fell in March from February's level, they remained above the averages for the third and fourth quarters of 1987 and were essentially unchanged from a year earlier. These overall data mask differences between deposit growth at District thrifts and at banks. Deposits at thrifts have shown growth over the last year. At District banks, however, deposit declines have been substantial, with particularly acute reductions occurring at large District banks. First quarter year- over-year declines in both the commercial bank and large District bank samples were markedly larger than for either of the two previous quarters. On the asset side, loans generally remain in a slide at the large banks, with business loans declining the most. Nevertheless, rates of decline in loans at large banks slowed markedly in the first quarter from the reductions of last year's third and fourth quarters, at the same time that growth in securities holdings has moved from positive to negative rates.