January 25, 1989
Overview
The Tenth District economy continues to grow slowly. Retail sales
have strengthened, as have new car sales. Manufacturers report high
capacity use rates and some labor shortages. Demand for capital
goods is still increasing. Farm incomes are at a high level, and
that sector's financial recovery continues. Housing activity is
weak, however, and the energy sector shows little change. Loan
demand at commercial banks has changed little, while deposits have
grown slightly.
Retail Sales
All respondents note that retail sales have improved from a year
earlier, and most report that Christmas sales expectations were met
or exceeded. Promotional activities have now returned to normal
post-holiday levels. Sales of sportswear and accessories are
relatively strong; sales of home furnishings are relatively weak.
Prices are generally steady to slightly higher with some retailers
reporting adjustments to wholesale price increases. Retailers'
expectations are optimistic and inventory levels are generally
satisfactory.
Automobile Sales
Most respondents report steady to slightly higher automobile sales
over the last month. Adequate dealer and consumer financing is
generally available. Most dealers report that they have sold most of
the 1988 model cars, but some report higher than desired inventory
levels. In general, dealers are optimistic about the outlook for
automobile sales during 1989.
Manufacturing
Respondents are reporting moderate increases in major input prices
compared with last year. Input prices are expected to level off in
the months ahead, with some materials prices expected to fall
somewhat. Firms are not experiencing difficulty getting materials,
with some lead times shortening and availability a little better
than a year ago. Most respondents are satisfied with inventory
levels, but a few plan to trim inventories. Firms are operating at
high levels of capacity use, with some shortages of labor, both
skilled and unskilled.
Demand for capital goods is still increasing, on balance, among Tenth District manufacturers, although a sizable minority of respondents report some slowing. Nearly all respondents directed their 1988 capital spending toward equipment purchases rather than new plant construction, a mix that is expected to continue in 1989. Capital spending in 1988 did increase capacity slightly, however, through replacing obsolete equipment with more progressive equipment, acquiring additional equipment, and adding shifts.
The majority of respondents export some of their output, and they report stable to increasing exports, which are unhampered by capacity constraints. Firms generally believe they can easily switch from producing for domestic customers to producing for foreign customers. Most respondents import some of their capital goods, but few have been increasing those imports. Uncertainty about changes in the value of the dollar is not an important consideration in capital spending decisions.
Energy
The District's energy industry remains stable following OPEC's
recent agreement to restrict output. Although oil prices have firmed
recently, uncertainty about the agreement's longer term effect on
oil prices has held down drilling activity. December drilling
activity was down over a fourth from a year ago, but the average
number of active drilling rigs in the district rose slightly from
263 in November to 270 in December.
Housing Activity and Finance
Housing activity in the district remains weak. Homebuilders report
that housing starts were down in December 1988 compared to December
1987 and were generally unchanged from November 1988. Single-family
construction continues to be the strongest component, while multi-
family construction remains weak, New home prices are reported
somewhat higher, and the recent high level of home inventories is
returning to normal.
Respondents from district savings and loan institutions report mixed savings inflow performance relative both to a year ago and to a month ago. Expectations of future savings inflows are also mixed. Promotional activity and a "flight to quality" from troubled institutions are largely credited for improvements in savings inflows at some institutions. Mortgage demand has been constant or down slightly in recent months. Mortgage interest rates have generally increased and are expected to increase further in the coming months.
Banking
District commercial banks report little change in loan demand over
the past month. Demand for commercial and industrial loans and
consumer loans was up slightly at a few institutions, while demand
for most other types of loans was either constant or down slightly.
About half of the respondents increased their prime rates by fifty
basis points; most of the others had raised their rates earlier.
Most of the respondents expect further increases in the near term.
Consumer loan rates increased at most of the banks surveyed, and,
again, most banks expect additional increases. Deposits increased
somewhat at district banks, with the greatest strength in demand
deposits, NOW accounts, and small time deposits.
Agriculture
Although the 1988 drought was generally not as severe in the Tenth
District as in other parts of the nation, the moisture situation and
crop conditions remain a concern in 1989. Several district areas
have experienced very dry conditions through fall end early winter,
and moisture is needed soon to ensure a healthy winter wheat crop in
1989. Soil moisture reserves are being further depleted by dry
weather, which will make 1989 crops especially dependent on timely
rains during the growing season.
Strong crop and livestock prices produced relatively high farm income in the Tenth District in 1988. As a result, year-end loan repayment rates were generally high, continuing the financial recovery begun in 1987. Most bankers in the region expect fewer credit renewals in the coming spring credit season as some farmers pay off operating loans and reduce carryover debt.
Changes in federal farm programs may have only a small effect on the financial situation of district farmers. Reduced acreage idling requirements may boost loan demand as farmers put land back into crop production. Fewer acres may be farmed in some areas of the district, however, as more acres are placed in the Conservation Reserve Program, trimming operating credit needs.
While strong livestock prices have contributed significantly to high farm income, little expansion has taken place in district livestock operations. Cow/calf operators appear to be just maintaining herds, holding back replacement heifers while selling cows. Inadequate wheat pastures have forced some stocker operations to reduce herds or purchase additional feed.