The economy of the eleventh district is continuing to expand at a rapid pace. Industrial production in Texas again rose to a record level in February, and total employment in the five district states continued to expand. Construction activity eased slightly in February, but remained substantially above its year-earlier level. District department store sales increased further in March, while new automobile registrations declined slightly in February.

The biggest concern of economists employed by business and financial institutions in the district appears to be the threat of renewed inflation. They do not attribute much of this concern to the introduction of Phase 3, however. The economists working for industrial firms indicated that the cost of goods used in their firms' production processes might increase somewhat as a result of Phase 3, but that prices of goods sold by their companies would not increase any faster because of the adoption of Phase 3.

Reflecting the growing tightness of labor markets in some areas of the district, several respondents indicated that their companies are experiencing some difficulty in obtaining skilled employees. None of the respondents indicated any problems in obtaining bank credit, although interest rates were expected to continue rising.

The seasonally adjusted Texas industrial production index rose sharply in February as tile manufacturing sector continued to surge. None the less, mining decreased for the fifth consecutive month and utilities increased only slightly. In manufacturing, only two industry groups—petroleum refining and primary metal products—failed to show an increase in February. The strongest production gains were reported in transportation equipment, textile mill products, and stone, clay, and glass products. All industries are producing over year-ago levels. In mining, the only reported increase in output was that of metal, stone, and earth minerals, as crude petroleum, natural gas, and natural gas liquids production all dropped in February. Utilities increased only slightly, as the drop in natural gas distribution almost entirely offset the increase in the distribution of electricity.

Although the Texas Railroad Commission permitted the Texas fields to produce at maximum levels again in April for the thirteenth consecutive month, the State's oil production has been declining since its peak in October last year. Part of the decline in January was attributed to weather, which will also be a factor in the expected drop for February. Moreover, although exploration has increased recently, the efforts have not been great enough to replace withdrawn reserves resulting from the heavy production over the past year. In spite of some government assurance that there will be no widespread rationing of gasoline this summer, rationing has become a reality in some areas and the oil companies feel that widespread rationing is a definite possibility.

Seasonally adjusted total employment in the five southwestern states continued to rise in February while the area's labor force fell slightly. The unemployment rate dropped sharply to 3.6 percent in February from a revised 3.9 percent in January. Both manufacturing and non-manufacturing industries shared in the monthly employment rise. Major gains were reported in durable manufacturing, construction, and government employment. All industry groups reported year-to-year gains in employment.

The value of construction contracts awarded in the five district states fell in February from the month-earlier level. A sharp decline in nonresidential building was the cause of the overall drop, as both residential building and nonbuilding construction posted slight increases. Despite the monthly fall, the cumulative value of contracts awarded this year remained substantially higher than last year. Texas followed the district trend, although registering a small year-to-year increase.

Sales of department stores in the district continued to rise above year-ago levels in February. Cumulative sales for the first three 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. San Antonio, Houston, and Austin reported the largest increases. The total number of new automobile registrations for the four largest metropolitan areas of Texas—Dallas, Fort Worth, Houston, and San Antonio—fell in February from the January level. Although Dallas and Fort Worth reported increases, these were not great enough to compensate for the declines in Houston and San Antonio. Nevertheless, the cumulative sales of new automobiles this year were still almost 20 percent above last year.

Agricultural conditions in the Southwest remain favorable, and district farmers are planning to shift more acreage away from the production of upland cotton and into crops of short supply such as feed grains, rice, and soybeans. Winter wheat is progressing quite well and prospects are good for an excellent crop.