March 9, 1971
Although bankers in the Eleventh District generally expect economic activity in this area to improve over last year, weak loan demand and continued inflation remain worrisome. A recent survey of bankers (some of whom are head office and branch directors) from large- and intermediate-size banks reveal that, despite a general lowering of interest rates, loan demand continues to be sluggish. Real estate lending has picked up slightly in some areas, but business and consumer loan demands are generally weak. Since December, demand deposits (not seasonally adjusted) have declined, while time and savings deposits have risen moderately, permitting banks to lower rates paid on CDs. Loan demand in the District remains sluggish and nearly all respondents report no material change in recent weeks. There has been some slight increase in real estate loans, especially at the smaller institutions, but both business and consumer installment loans are reported to have declined. Defense industry layoffs and some uncertainty about the economic outlook probably account for much of the weakness in loan demand. In addition many bankers note that continued inflation has tended to dampen consumer optimism and spending. However, pent-up demand for housing, coupled with lower mortgage rates, has led to some increase in real estate loans.
All of the respondents reduced their prime rate recently, with most of the larger banks now quoting the New York prime rate. However, many of the smaller banks report prime rates 1 to 1 3/4 percentage points higher than those in New York. Presently the larger banks typically carry 10 percent of their loans at the prime rate, while smaller banks report carrying anywhere from 2 to 30 percent of their loans at prime. Nearly all of the banks surveyed do make mortgage loans; however, the smaller banks usually report holding a larger portion of their loan portfolio in mortgages. Current policy towards investment as well as loan portfolio management differs widely between the institutions surveyed. In general, the respondents currently hold 60 percent of their investment portfolios in U.S. Government securities. However, a few banks lean heavily on municipal holdings. At present, large banks typically hold 40 percent of their investment portfolio in municipal securities with an average maturity of eight years. Smaller banks generally hold a somewhat larger amount of municipals, with a six-year average maturity. Nearly all of the respondents report regular participation in the Federal funds market; however, few have outstanding commitments with other banks for regular transactions. Of those with outstanding commitments, larger banks currently buy or sell from $2 to $15 million daily, while smaller banks trade from $0.5 to $3.5 million per day.
Probably reflecting sluggish economic activity as well as seasonal factors, demand deposits at most of the respondents' banks have declined since yearend. Demand deposit levels have generally fallen (5 to 10 percent annual rate)—with some of the larger banks showing even a more substantial decline (15 to 25 percent). Total time and savings deposits are up at most banks, as passbook savings deposits have shown a moderate increase since December. Although many of the smaller institutions do not issue large CDs ($100,000 plus), those that do report a sizable volume of new issues since year-end.
Although market interest rates have fallen across-the-board, nearly all of the banks surveyed are paying the ceiling rate on passbook savings deposits. In the light of recent declines in money market rates, some of the respondents recommend that the Regulation Q ceiling on savings deposits be lowered to 4 percent, although not until ceiling rates payable by savings and loan associations are lowered.
Recent figures on economic conditions in the District seem to indicate continued slow growth. Although actual nonagricultural employment for the District was down slightly in January, seasonal expectations had suggested a much sharper drop. Retail sales for January and early February are up 9 percent over last year—a possible sign of some slight improvement in the consumer sector.
Industrial production has remained essentially unchanged with some small increase in manufacturing of both durable and nondurable goods.
Texas oils allowable for March are unchanged from February, which makes them more than 5 percent lower than the record levels of last November. However, all other District states are now producing at record levels. In addition, District agricultural conditions appear to be improving. Expected acreage to be planted with sorghum and other grains is up 10 to 14 percent over last year. Placements into Texas feedlots during January increased 45 percent over the same period a year ago—resulting in a new record number of cattle on feed.