May 4, 1988
Overview
The economy of the Tenth District continues to show slight
improvement. Retail sales are generally above year-ago levels, and
unchanged to slightly improved in recent months. New car sales have
also improved recently. While still weaker than a year ago, housing
activity is increasing slightly as is home mortgage demand. While
manufacturers' input prices are generally rising only moderately,
the prices of some materials are increasing more rapidly. Lead times
for some materials have increased. Both manufacturers and retailers
report some trimming of inventories. Loan demand and deposit growth
at commercial banks are both somewhat stronger. Farm incomes will
likely be below those earned last year.
Retail Sales
Tenth District retailers generally report sales above year-ago
levels, and unchanged or slightly improved sales over the past three
months. Overall, retailers report few price increases. Although
respondents are generally satisfied with present inventory levels,
nearly all have been trimming inventories and may trim further. In
general, retailers expect slightly improved sales over the next
several months and anticipate few price increases.
Automobile Sales
Auto dealers generally report some recent improvement in sales.
Adequate financing is available for both dealer inventories and
customer purchases. Dealers are cautiously optimistic about 1988
auto sales. Reports on inventory changes are mixed.
Manufacturing
Most input prices have risen only moderately in the past year, but
increases for steel, plastic, aluminum, and paper products are
reported to have been more substantial. Materials are generally
available, but lead times have increased. Respondents report
continuing efforts to reduce inventory levels, now considered
somewhat high. Capacity utilization rates vary widely, ranging
between 70 and 90 percent.
Energy
Crude oil prices have firmed significantly in recent weeks due to
potential cooperation between OPEC and non-OPEC producers and the
tension in the Persian Gulf. Nonetheless, uncertainty about supplies
and prices will probably limit further improvements in the
district's energy industry. The average weekly number of operating
drilling rigs in the Tenth District increased slightly from 273 in
February to 279 in March, about 14 percent above the average
recorded in March 1987.
Housing Activity and Finance
Activity in the housing market has improved recently, but continues
to be weaker than last year. Housing starts are reported slightly
above last month's levels, but down substantially from a year
earlier. The recent increase in activity is generally the result of
single-family construction. Multi-family construction remains weak
across most of the district. Most respondents report improved sales
of new homes. Homebuilders report no problems with materials
availability or delivery times.
Nearly all respondents report that savings deposit inflows are slightly higher than a year ago and have been steady over the last month. Inflows are expected to remain steady. Recent mortgage demand has generally increased, due mostly to seasonal factors. However, most respondents report that demand is not as strong as last year at this time. Mortgage rates are reported trending higher and are expected to stabilize or rise slightly further.
Banking
District commercial bankers report generally stronger loan demand
over the past month. Demand for commercial and industrial loans,
agricultural loans, and commercial real estate loans have shown the
most strength, while demand for consumer loans and residential real
estate loans have, on balance, shown little change. Virtually all of
the respondents report no change in the prime rate over the past
month, but nearly half expect some movement in the near term.
Consumer lending rates have been stable and are expected to remain
so. Total deposits are reported up somewhat over a month ago.
Conventional NOW accounts, Super-NOW accounts, MMDA's, and
IRA's/Keogh's have shown some strength, while demand deposits and
large CD's have shown some weakness. Passbook savings accounts and
small time deposits are, on balance, little changed.
Agriculture
Agriculture's strong income performance in 1987 is apparent in
spring credit reviews at district agricultural banks. Bankers report
that most borrowers had positive incomes last year, with livestock
producers' incomes exceptionally strong. However, smaller government
payments and smaller livestock returns will likely push incomes
modestly below those earned last year. Very few farm borrowers were
denied credit at district agricultural banks this spring. District
bankers also report that competition from the Farm Credit System
(FCS) has intensified, especially since the enactment of the
Agricultural Credit Act of 1987. Interest rates offered on loans by
FCS units are 50 to 100 basis points below local bank lending rates
in some markets.
Crop growing conditions vary widely across the Tenth District. Soil moisture is plentiful in some areas, but inadequate soil moisture is threatening crop yield prospects in others parts of the district. Much of the progress many farmers have made toward financial recovery could be reversed by drought-shortened crop yields. Moreover, cattle feeding margins are being squeezed by continued high feeder cattle prices and developing weakness in fed-cattle prices. With current profit margins low and a market outlook that suggests fed-cattle prices may move lower, many feedlots in the district are now operating at below capacity.