An informal poll of director opinion reveals a considerable deterioration in expectations tied mainly to the slump in stock market prices. Concern over bank liquidity and credit quality is evident, but primary worries are on the status of the economy. Most directors believe the nation will be facing very difficult business conditions for at least the remainder of 1974. However, most also believe we have no choice but to stay with a heavily restrictive monetary policy to dampen inflation. They believe that possible increased restraint in fiscal policy might permit some modest easing of credit restraint.

Increased output of petrochemicals accounts for much of the continued growth in industrial production in the Eleventh District. Petroleum refining has grown steadily since March when foreign oil began flowing to Texas refineries. Crude runs to stills have now climbed well above the levels that prevailed prior to the Arab oil embargo, and expanded refinery output has increased feedstocks to chemical producers who are hard pressed to meet soaring demand. Industrial production has also been boosted by gains in textile output. Shortages of fibers have eased and have allowed textile producers to replace badly depleted inventories of finished goods. Paper producers, on the other hand, report the availability of wood pulp remains tight, but they have been able to increase output nonetheless.

The boom in drilling continues, although constrained by availability of equipment and trained manpower. Nearly a third of the wells being drilled in the nation are in Texas, and drilling activity in the State is running 25 percent ahead of last year's pace. Despite more drilling, crude oil production in the State is little changed from a year ago, while natural gas production is down slightly. However, total crude production in all of the District states is below year-earlier levels because of reduced outputs in Oklahoma and Louisiana.

Residential construction in Texas continues to deteriorate. Housing starts have fallen sharply for three consecutive months to the lowest level since February 1967. Savings and loan executives report the rate of deposit losses has accelerated, resulting in further sharp reductions in lending activity. For example, the president of the largest savings and loan association in Houston claims he is "completely out of the home lending market."

The decline in residential construction is also impacting heavily on the sales of home furnishings. At the retail level, department store executives in the District attribute the recent drop in retail sales to sharply lower purchases of furniture and appliances. In addition, furniture production by Texas manufacturers has fallen for three straight months.

There are indications that the eight-month slump in new car sales may be easing. New car sales in Texas' four largest metropolitan counties were 13 percent higher in July than in the previous month. Dealers attribute the turnaround primarily to customers who are scrambling for the remaining 1974 models in order to avoid the higher list prices on the 1975 models.

The labor market in Texas is generally "tight." The unemployment rate is currently 4.0 percent, and initial claims on employment insurance in the state are at the lowest level since last January. The latest statistics show that employment in manufacturing, which had declined in the spring, has recently registered strong gains. In addition, the average workweek in manufacturing has stabilized at a seasonally adjusted 40.7 hours after falling earlier this year. Despite the deterioration in home building, the reduction of construction jobs has been modest, as many workers have been able to find jobs in nonresidential construction. Also, the increase in oil well drilling has resulted in a substantial rise in mining employment.

Crop production in the southwest has been reduced sharply due to severe drought conditions; and therefore, much of this year's harvest will come from irrigated farmland. Based on August 1 conditions, prospects for the dryland cotton, grain sorghum, hay, and peanut crops in the District states were poor, with total crop output expected to lag 1973 levels by at least a fifth. Hardest hit are some West Texas counties where less than 10 percent of the dryland cotton acreage is expected to be harvested. Because of the drought, the Texas Department of Agriculture estimates crop receipts will be $1 billion less than a year ago. An additional $1 billion loss will result from lower cattle prices and leave Texas farmers and ranchers with cash receipts of about $4.4 billion. Recent rainfall has improved range and pasture conditions and has slowed the marketing of livestock to near seasonal levels. However, ranchers fear that limited supplies of higher priced feed will force large reductions in the sizes of breeding herds. The sale of such a large number of cows and calves would initially glut the market and depress cattle prices. But in the long run, cattle production would be hampered by a sharp cutback in breeding stocks, and the price of beef could skyrocket.

Limited supplies and high prices of agricultural inputs, particularly livestock feed and fertilizer, are of deep concern to agricultural lenders. A leading authority on agricultural finance in Texas predicted that farmers, ranchers, and agribusiness firms are entering a perilous new era where financial risks are higher than a few years ago because of larger capital requirements and volatile fluctuations in farm prices.