Beige Book Report: Dallas
December 10, 1975
Industrial output in the Eleventh District has risen steadily since last spring. The recovery in production, however, has been uneven among District industries. Those industries tied to the production of oil field equipment, such as fabricated metals and nonelectrical machinery, continue at boom levels. The output of chemicals has rebounded strongly. And apparel makers, deluged with new orders, are running at full production. This has meant strong demand for textiles and those chemical products used in synthetic fibers. But output in construction-related industries—most notably, primary metals—remains depressed.
The recovery in chemical production has been due, mostly, to rebuilding of stocks by users. This follows a period of heavy inventory liquidation. But now, producers report that new orders are being pushed up by widespread inventory speculation as price pressures mount in that industry. Prices of some basic plastics, such as monomers, were raised 25 to 30 percent in the summer and fall. As a result, users would like to build stocks further before the next round of price hikes, expected in January. But, they add, producers are largely preventing this by deliberately delaying shipments.
Recent price increases have resulted in a severe cost-price squeeze for plastics user firms. Demand for their products has not strengthened enough, thus far, to allow these firms to pass the bulk of higher costs on to their customers. Consequently, a number of smaller firms are being pushed out of the market and are looking for larger firms to buy them out. The treasurer of one of the District's leading producers of plastic pipe said that in one week recently he received three such overtures.
Apparel manufacturers continue to step up production in response to a backlog of orders. Payrolls are being expanded and new plants are opening. And several garment makers are seeking sites for additional manufacturing facilities. Some clothing lines are sold out until February. And District firms generally feel retailers will continue to build inventories from current levels. An El Paso manufacturer, for example, reports that brisk sales at the retail level are forcing his customers to abandon the cautious ordering policies they had been practicing. One indication that retail stocks are still too low is that retailers are now accepting late shipments.
Steel production at District mills is severely depressed. Output is down roughly 25 percent from a year ago. The largest steel mill in the District reports business is "horrible," with new orders running at the slowest pace of the year. The falloff has been centered in structural steel and has been due, primarily, to the steady decline in nonresidential construction in the Southwest in 1975. Manufacturers do not expect a substantial recovery in demand until, at least, mid-1976. And there is concern that when the recovery comes, a large part of the business will go to foreign producers. Today, foreign mills, particularly Japanese producers, are undercutting domestic steel prices by 20 to 25 percent.
The sluggish pace of construction activity has led to extremely aggressive bidding by manufacturers of building materials for new projects. A Fort Worth manufacturer of reinforcing steel bars said mills are engaged in the most aggressive price-cutting that he has seen in 25 years in the industry. Many jobs are actually being bid below cost as mills try to keep their share of the market and attempt to hold on to the backbone of their work force.
A survey of independent oil producers reveals a consensus of opinion that the proposed energy legislation before Congress would be a disaster if enacted. The respondents feel changes are due but not in the direction of those proposed. Not only would changes now being considered roll back crude oil prices from an average of $8.75 per barrel to $7.66, but legislation would tighten the rules expensing intangible drilling costs. The latter change would reduce funds available for drilling and impact most severely on small independents, who account for much exploratory drilling. Passage of the legislation would not affect current drilling commitments, but thereafter, new commitments could fall off sharply.
New car sales have firmed at District dealerships. Compared with a year ago, sales in Dallas and Houston were up 54 percent and 32 percent, respectively, in the mid-November reporting period. The market, however, is two-tiered. Demand is strong for the smaller economy cars and the large luxury models. In addition, customers are much more willing to buy optional equipment than a year ago. Inventories of new cars have been tight this fall. In one case, a leading dealer in North Texas sold 253 new cars in November, out of an inventory of 270 units. But factory shipments are expected to catch up with sales by year-end, and dealers are looking for continued improvement in sales in 1976.
On balance, labor markets in the District states continue to improve, as the rise in employment is outpacing the growth in the labor force. The number of jobholders is 2 percent above the level of a year ago, and the unemployment rate has dropped to 6.9 percent. Growth in employment in nonmanufacturing is faster than in manufacturing. Factory payrolls are up, bolstered by the increase in workers in nondurable goods industries. The average workweek in Texas also continues to edge upward, but employment in durable goods manufacturing in the District states is slow to recover. The number of construction jobs has increased but only with the ending of a series of strikes, and employment in the building trades remains substantially below the level a year ago.