September 6, 1988
Overview
Economic activity in the Tenth District is mixed, with sluggishness
in housing and retail sales and strength in manufacturing. New car
sales are steady to slightly higher, but other retailers report
steady to slightly lower sales. In the manufacturing sector, many
firms are operating near capacity and lead times and input prices
continue to increase. Housing starts are below last month's levels
and mortgage rates are rising. Both loan demand and deposits have
increased slightly at district commercial banks. Effects of the
drought on row crops and livestock operations remain a major
concern.
Retail Sales
Retailers generally report sales steady to slightly lower compared
with a year earlier, as well as with a few months ago. Some
retailers report strong sales in home improvement and entertainment
products, while sales of certain lines of apparel have been weak.
Most respondents are satisfied with current inventory levels, and
are buying cautiously. Retailers generally expect only slow sales
growth in the near term.
Automobile Sales
Automobile dealers report that sales are steady to slightly higher
aver the past month. Dealer inventories are down slightly due to the
ending of the model year. Most dealers express optimism for future
car sales.
Manufacturing
Many respondents report that plants are operating near full
capacity. While materials are generally available, lead times have
lengthened. In general, input prices continue to increase and most
respondents expect further increases in the next quarter.
Respondents consider inventory levels satisfactory or slightly high,
and most plan to trim inventories in its near future.
Energy
The Tenth District's energy industry has been more resilient than
expected in the face of weaker nil prices due to surging production
by most OPEC members. Exploration and development activity in the
district improved in July, despite domestic oil prices that averaged
more than a dollar below June prices. The average number of active
drilling rigs in the district rose from 258 in June to 268 in July.
During the first three weeks of August the rig count increased to
274.
Housing Activity and Finance
Area homebuilders report that housing starts are below last month's
levels and at or below last year's levels. New home sales and prices
are generally steady and housing market performance is expected to
remain steady. Inventories of unsold homes vary across the district
depending on local conditions. A few respondents report some
construction material shortages and higher material prices.
Nearly all savings and loan respondents report that savings deposit inflows are near or above year ago and month ago levels. Most respondents expect flat or slightly increasing inflows in the near future. In general, mortgage activity has been weak and this weakness is expected to continue through the end of 1988. Mortgage rates have been increasing, and most respondents expect them to rise slightly during the remainder of 1988.
Banking
District commercial banks report a slight increase in loan demand
over the past month, with the greatest strength in commercial and
industrial loans. All respondents increased their prime rates by 50
basis points in the past month. For some, this increase followed a
similar increase in July and about half the respondents expect a
further increase in the prime rate in the near term. Consumer loan
rates also increased by 50 basis points at most of the banks
surveyed. On average, deposits increased slightly at district banks,
although a number of respondents report no change in deposits.
Agriculture
Crop and range conditions vary widely across the Tenth District. The
effects of the drought on corn, soybeans, and other row crops remain
of major concern. Timely rains in many parts of the district have
improved crop growing conditions and limited crop deterioration
since the USDA's August 11 crop report. Irrigated crops are
generally in very good condition throughout the district, but the
shortage of rainfall has boosted irrigation requirements and driven
irrigation costs much higher. Planting of the winter wheat crop
begins during the next few weeks, and timely rainfall will be
critical to the crop's early development.
The drought has also had a significant effect on district cattle feeders and ranchers, but drought-induced liquidation of district cattle herds has been limited. Cattle feeding costs have risen, and scorched pastures and reduced forage production have forced the movement of cattle from drier areas to areas with better grazing conditions. Development of winter wheat pastures this fall will depend on rainfall received during the next month. If wheat pastures prove to be inadequate, further liquidation of district cattle herds may occur.
Despite the drought, most agricultural bankers in the district anticipate little change in the rate of loan repayments from last year Most borrowers were able to rebuild financial reserves in recent years, and this year highest crop prices will help offset smaller crop yields. Most district farm lenders and borrowers will be able to withstand the effects of the drought.