October 18, 1988
The District economy is sluggish, but there are positive signs. Orders to manufacturers are growing slowly overall. Retail sales show little increase. Auto sales expansion is weak. Construction activity is turning up. Drilling is falling in the wake of oil price declines. The drought has had little effect on District farm cash incomes because rising product prices have offset diminished yields. Economic performance varies widely across the District, with relatively strong growth occurring in Houston.
Orders to District manufacturers are noticeably above a year earlier, but growth has been slower in the last few months. There are a number of exceptions to this overall tendency, however, as sales patterns vary greatly across industries. For example, chemical producers continue to cite strong sales growth and to note capacity constraints. Expansions of plant and equipment in this industry are widely reported. Sales of paper and paperboard are rising and product prices have increased substantially, but plans for capacity expansion are rare. Orders to computer manufacturers are up markedly and respondents say that their product inventories are at undesirably low levels. Electronic equipment manufacturers also note some recent increases in sales. Construction-related manufacturers, including those in fabricated metals, lumber, and stone, clay and glass, generally cite sluggish demand except in the Houston area. Most oilfield equipment firms note that sales are weak because of low levels of drilling activity. District food processors cite little change in orders from earlier this year, but apparel producers say their sales have been growing fairly steadily.
As a result of sluggish demand, many retailers have discounted heavily to bring inventories down to desired levels. After a protracted period of weakness, apparel sales have begun to turn up in recent weeks. Retailers expect revenues in this year's Christmas season to be moderately higher than last year's and they expect seasonally adjusted growth to continue thereafter.
Auto sales vary with the economic fortunes of District communities. Houston sales have lately shown steady growth and dealers expect past patterns to continue. In Dallas, sales are about 2 percent below a year earlier, which was a weak period. Dealers there anticipate little change in sales, aside from normal seasonal variations.
District construction activity continues to show moderate gains. The total value of construction contracts in the District has now increased, on a three-month moving average basis, for four months in a row. Although earlier increases were concentrated in New Mexico and Louisiana, Texas also showed growth in August. The gains in contract values have been led by expansion in residential building, although nonresidential has shown some slight recent expansion. District construction employment continues to decline, but the pace of reduction is somewhat slower than at the beginning of the year. Nevertheless, some Houston area industrial construction firms say they are concerned about shortages of civil engineers.
Oil and gas drilling continues to slip in response to declines in oil prices and to concerns that low prices will persist. After falling for four consecutive months, the District rig count was 14 percent lower in September than in May. Respondents expect drilling activity to remain low over the next four quarters. Recent declines in well permit applications and a drop in the price of West Texas intermediate crude oil to below $13 per barrel offer bases for concerns about the near-term future of extraction activity in the District.
Cash income to District agriculture is anticipated to reach predrought expectations, in part, because some reduced yields have been offset by increased prices. For example, while District sorghum yields are down 25 percent from a year earlier, prices are up by 58 percent. Corn yields are down by less than 2 percent, while prices are up by 47 percent. The increasing grain prices are squeezing profit margins of livestock producers, whose product prices have risen by far less than the cost of feed. The fortunes of cotton farmers are diminished from a year ago, as prices have dropped 24 percent and yields are down by 20 percent.