September 6, 1988
The District economy continues to grow slowly. Orders to manufacturers are rising modestly. Oil and gas drilling activity has been weakening. Retail sales are edging upward. Overall, auto sales are climbing, but they are greatly varied across the District. The protracted decline in construction activity appears to be over, but a major rebound shows little evidence of materializing. Rising prices for agricultural products have largely offset the financial impact of drought-related declines in District crop yields. Assets of financial institutions are still slipping, but the rate of decline has flattened. Although optimism about prospects for the District economy remains fairly widespread, an increasing minority of respondents are expressing concern over a possible U.S. economic downturn in 1989, and an allied decline in the District.
District manufacturers generally report rising orders, but they say that recent sales growth has been slower than the expansions of the second half of 1987. Orders are rising fastest at firms producing electronics, primary metals, and chemicals. For chemical producers, capacity constraints continue to hold down production below desired levels and low product inventories are said to have become a problem at some plants. Reports of sales growth by apparel manufacturers are mixed. Competition from foreign sellers in this industry is said to remain strong. Manufacturers that supply the construction industry—including producers of lumber and wood products and stone, clay, and glass—continue to note that their sales are weak. District aircraft production, much of which is defense-related, is little changed. Among food processors, demand growth is consistent with what they characterize as the overall slow growth of the southwestern economy.
District retailers say sales have been growing recently but that increases have been slight overall. As a result of unexpectedly sluggish sales, inventories are higher than desired. Some retailers note continued high ratios of store square footage per customer in the Districts larger cities and they say that this phenomenon has held profits down. Respondents express guarded optimism about future sales, but they expect the District economy to continue its recovery through the end of 1988 and they believe their sales will go up accordingly.
District auto sales are generally up, but there is wide variation across areas while sales in Houston are showing strong expansion, the auto market has been very soft in Dallas/Ft. Worth. Dallas dealers say they are having difficulty getting as many cars as they think they can sell because of their weak sales in the past.
District construction activity has recently increased, but it remains at low levels. Due to gains in Louisiana and New Mexico, the value of construction contracts in the District rose moderately in the second quarter. These recent expansions have been fairly evenly distributed between nonresidential and residential building. Rising residential permit issuance is said to suggest some further strengthening in residential activity for the near future. Despite these increases, District construction employment continues to decline. Respondents say that employment reductions are likely to abate this year in a lagged response to the end of declines in contract values.
District drilling is weakening. After four months of moderate gains, the District rig count fell in June, July, and the first half of August. The rig count has declined 14.4 percent since May and has reached its lowest level since June 1987. Although well permits were up slightly in June, respondents do not expect any significant rebound in oil prices and they accordingly anticipate ongoing sluggishness in drilling activity.
Drought is not expected to reduce District farm cash income significantly in 1988. Unlike most drought-stricken areas of the United States, the District's moisture conditions have lately improved. Furthermore, grain prices have risen as much as 50 percent from a year earlier, while drought-caused reductions in production have been small. Strong demand has also pushed up cattle prices. The Texas All Farm Products Price Index was 12 percent higher in July 1988 than in July 1987. Among reported crops, only upland cotton has experienced declining prices. Cotton yields are about the same as a year ago.
Total deposits at District financial institutions continue to show year-over-year declines, but rates of reduction have lately diminished. In July, total deposits were only 0.1 percent below a year earlier. The weakest categories remain large time deposits and MMDAs. Loans at large District banks have continued to fall, led by declines in business and real estate loans. Holdings of securities are also declining.