The petroleum industry remains primarily responsible for the reduced industrial output in Texas, as measured by the industrial production index for the State. However, the most recent drop in industrial activity was not confined to petroleum related industries. After growing at progressively slower rates, manufacturing of durable goods, the most sensitive cyclical component of the index, has also begun to fall.

Recent declines in industrial production in Texas have been more prolonged and more severe than in the Nation as a whole. For example, the December decrease in the State index was nearly four times as great as that in the national index. The difference reflects the greater importance of petroleum related industries in the State index.

However, the slowdown in overall economic activity, as indicated by total employment growth, has been less severe in Texas than in the Nation. Total employment in the Nation has declined for the past two months as compared to a leveling off in the growth of Texas employment. The greater stability of the State economy is largely due to the smaller reliance on manufacturing activity.

Seasonally adjusted department store sales in the Eleventh District increased 4.5 percent from mid-December to mid-January, the third consecutive four-week gain. The rate of increase represented the largest monthly advance since department store sales turned up in mid-October. Representatives of several of the leading department stores in the State have indicated that the recent strength was unexpected, and they still remain committed to conservative sales forecasts and inventory management for 1974.

Savings deposit inflows at mortgage lending institutions in Texas have been increasing since August and should continue to grow through mid-1974, according to representatives of two of the largest savings and loan associations in Texas. They pointed out that the decline in mortgage commitments has stopped and cited this as evidence that mortgage lending has begun to turn around.

However, any resurgence in residential construction is expected to face continued high mortgage rates and rising building costs, two of the key problems which depressed the Texas housing market last year. Even with increased availability of mortgage funds, a vice president of Dallas' largest savings and loan association doubts that mortgage rates will decline substantially. In addition, local homebuilders anticipate that widespread increases in building costs will continue through 1974.

Record crop yields and advanced agricultural prices have contributed to sharply increased inflows of deposits in recent months at rural banks in the Eleventh District. However, by summer these banks expect their liquidity positions to tighten considerably. Farmers are increasing their demand for funds to meet expanding operating expenses and purchases of capital equipment. A heavier than usual drain on deposits at these banks is also anticipated due to larger income tax payments by farmers. And the cancellation of Agricultural Stabilization and Conservation Service payments will eliminate the inflow of funds to banks from this source that usually takes place in July and August.