The economy of the Eleventh District continues to advance as 1973 unfolds. Industrial production in Texas rose to a record level in January, and total employment in the five District states continued to expand. Construction activity in the District states also increased in January, and District department stores sales showed monthly as well as year-to-year increases in February. New automobile registrations fell in January but were still well ahead of their year-earlier pace. The results of a recent survey of our directors who are bankers indicate that business in the Eleventh District is likely to improve still further over the next six months but that inflationary pressures are also likely to mount.

Most responding bank directors feel that business conditions in their communities have improved over the past three months and are likely to continue improving over the next six months. While the majority foresee little change in the rate of increase in consumer prices during the first half of 1973, most believe that the rise in consumer prices will accelerate in the second half of the year. The majority also indicated that the introduction of Phase Three caused them to alter their expectations with respect to future price movements, and they now believe that prices will rise much faster than previously anticipated. About half the directors improved their expectations of future business conditions because of the recent devaluation of the dollar. The remaining half indicated no change in their outlook.

Most respondents expect short-term market rates of interest to increase over the next six months, but only a few expect substantially higher short-term rates. The majority anticipate little change in long-term rates, although some expect a moderate increase in these rates. None expect either category of rates to be lower. Almost none of the respondents anticipate that the prime lending rate will rise above 7 percent at either midyear or the year-end.

In reply to questions relating to their particular banks, our directors indicated that business, consumer, and mortgage loan demand strengthened moderately during the last three months. Only agricultural loan demand remained essentially unchanged. Most respondents did not essentially change their willingness to make mortgage and agricultural loans during the last three months. A few were even more moderately willing to make consumer and business loans.

Taking into account their expectations for loan demand, our directors generally rated funds either very available or moderately available at their banks. Slightly more than half are aggressively seeking large certificates of deposit (CDs). While the majority were paying less than 6 percent for 30- to 89-day large CDs, most were paying between 6 and 7 percent for CDs with maturities beyond 89 days. The Directors split half and half as to whether they expect disintermediation of savings and time deposits in the coming six months.

The seasonally adjusted Texas industrial production index rose to a new high in January after easing slightly the month before. Both the manufacturing and mining components increased, while the utilities components fell slightly. In manufacturing, both durable and nondurable goods industries shared in the monthly rise.

Oil allowables for the District states were left unchanged in February, permitting maximum production of crude oil except for a few fields in Texas that are partially restricted for conservation reasons. With the prospect of gasoline shortages in the near future and the difficulty of getting enough low sulfur crude from abroad, refiners in the District are finding themselves in a production bind.

Seasonally adjusted total employment in the five southwestern states rose substantially in January. Nevertheless, the unemployment rate remained at 4.1 percent slightly higher than a year ago.

The value of construction contracts awarded in the five southwestern states continued to rise in January. Both residential and nonresidential building in the five-state area rose from December levels, while nonbuilding construction fell moderately.

Sales of department stores in the District continued to rise above year-ago levels in February. Cumulative sales for the first two months of the year were significantly above the level for the corresponding period last year in all five metropolitan areas for which data are regularly published. The total number of new automobile registrations for the four largest metropolitan areas of Texas—Dallas, Fort Worth) Houston, and San Antonio—fell in January from the December level, although the San Antonio area reported a slight increase. Nevertheless, the level in January is still more than 30 percent higher than in January a year ago.

Agricultural activities in the District have been hindered by cold and wet weather conditions. However, the winter wheat crop is making good to excellent growth as moisture is adequate. Farmers of the five District states sold nearly $7.3 billion of farm products in 1972. This is 15 percent above 1971 and established a new record for cash receipts from farm marketings. This higher cash flow level has been reflected in increased expenditures for land and capital items.