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Dallas: October 1974

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Beige Book Report: Dallas

October 9, 1974

Growth in business loans at commercial banks in the Eleventh District has abated since midsummer as bankers reportedly have tightened lending policies in an effort to avoid further reducing their liquidity positions. Nonetheless, loan officers report demand has remained strong, and they have encountered only minimal resistance to high interest rates, mostly by smaller borrowers. Tight conditions in capital markets have resulted in considerable demand pressures on banks as companies have relied more heavily on bank credit lines for capital expansion. Much of this borrowing was originated on a short-term basis, and these loans have been rolled over as customers have been unable to secure long-term funds in the bond and equity markets. In addition, high prices for some raw materials have also contributed to a greater loan demand as businesses have tried to build up inventories of scarce materials.

Lenders are relying on greater selectivity in granting loans rather than raising interest rates to hold down borrowing. Bankers report they are closely screening loan applications, and typically only requests by old customers are considered. Moreover, all "speculative type" loans, particularly construction loans, are being discouraged.

All of the bankers surveyed said they are not actively seeking new consumer loans because of the low profit margin available under state interest ceilings. They are, however, attempting to accommodate their old customers. Much of the recent strength in consumer borrowing reflects personal loans to maintain current living standards, including the greater use of bank credit cards. However, automobile loans are up substantially, and some bankers report a rise in borrowing to purchase recreational vehicles.

Commercial builders in the District warn of a severe curtailment in nonresidential construction activity in coming months. Most builders interviewed feel commercial construction has held up fairly well because of the long completion time required for most projects—typically more than a year. But as jobs are completed, builders are finding little new work—as evidenced by the 50 percent drop in nonresidential building permits in the past three months.

Real estate loan officers at leading District banks generally agree that the outlook for commercial building is bleak. Obtaining interim financing is "nearly impossible" according to contractors, although some long-term financing is believed to be available. But the increased restrictions on loan requirements have sharply reduced the number of all loans granted. None of the bank loan officers interviewed will make interim loans unless builders have an "ironclad" commitment for long-term financing that completely covers the cost of construction. As a result, new commitments are reported to be at less than half the level of a year ago. But some banks have experienced much sharper declines and claim new commitments are at a "standstill." For example, a large bank in Houston has made only one new commitment in the last month.

Even when funds are available, the cost of borrowing is often prohibitive. Larger banks in the District are currently charging 14 to 15 percent on interim loans plus a 1 percent a year fee. And most builders cannot make a profit on these terms. Even the cost of the available supply of long-term funds has rendered many projects economically infeasible. In El Paso, for example, two development projects were canceled because permanent financing was so expensive that construction could no longer be justified.

Manufacturers of chemicals and plastics report no letup in the heavy demand for their products. Because production is running at full capacity, unfilled orders have reached the highest level in the history of many of the firms contacted. Most manufacturers have been forced to allocate their output among old customers and are not taking orders from new buyers. Shortages of raw materials for industrial chemicals and plastics have eased somewhat, and some leveling off in prices was reported. Fertilizer production, on the other hand, is still hampered by shortages of nitrogen and phosphate. Capital spending plans remain strong in these industries with only minor revisions due to high financial costs.

Steel producers report that while overall demand is heavy, there has been a letup recently in new orders for reinforcing steel rods and oil field pipe. The decline in construction activity, first in residential building and then in commercial building, accounts for the softening in the demand for reinforcing rods. However, the big accumulation of field pipe inventories represents months of overbuying by the petroleum industry to hedge against possible shortages of drill pipe. However, even in these product lines, steel manufacturers plan no letup in production this year in order to rebuild badly depleted stocks of their own inventories of finished goods. Therefore, faced with capacity limitations and improved availability of scrap metal, firms are going ahead with ambitious expansion programs despite tight capital markets.