Beige Book Report: Dallas
January 14, 1976
The year-long recovery in department store sales in the Eleventh District was capped by a big surge in Christmas buying. Most merchants found December sales far exceeded their earlier expectations and, as a result, unit sales were up significantly. Sales statistics were especially robust in Dallas and Houston, where many outlets reported sales revenues were up a fifth or more from a year earlier. In general, stores selling better quality merchandise recorded the biggest sales increases. Retailers also noted cash sales were abnormally high. For example, many stores reported half their sales were in cash, or more than twice the normal share. The current wave of buying is expected to continue into spring, with merchants expressing sales prospects as good to very good. Current inventory levels are generally considered to be adequate in light of current sales forecasts.
Lending activity at District savings and loan associations continues to increase. The volume of mortgage loans rose steadily last year, and loan officers expect continued growth throughout 1976. In addition, several associations recently reported substantial increases in interim construction lending to home builders.
Mortgage lenders see no letup in the strong pace of savings inflows that they have experienced since early 1975. Thus, they expect to be able to accommodate increased loan demand without tightening lending terms. In fact, nearly half of the associations contacted predicted conventional loan rates will drop a quarter of a point by April. A leveling-off in the overall cost of savings also eased the upward pressure on loan rates, as maturing certificates of deposit are being rolled over at substantially lower interest rates. Mortgage lenders expressed optimism that their cost of funds would remain relatively stable throughout the year.
Changes in the petrochemical industry are having diverse effects on capital spending by the District's largest industrial complex. Despite the rollback in domestic oil prices, the drilling boom and heavy demand for oil field equipment should continue in 1976. Manufacturers of this equipment are operating near peak capacity and plan to step up outlays for plant and equipment. Two large equipment producers have announced major plant expansions, while several other firms will modernize existing facilities.
Chemical producers will also continue to invest heavily. Although chemical plants valued at an estimated $3 billion are currently under construction on the Texas Gulf Coast, the strength of the current recovery is expected to strain existing facilities by the year-end. Capacity utilization by the largest chemical firm, for example, is expected to reach 84 percent, up from 72 percent in early 1974. When capacity utilization was above 85 percent in 1973, widespread production bottlenecks occurred.
Investment by refiners, on the other hand, will be below last year's
level of spending. As a result of higher costs for petroleum
products, particularly gasoline, refiners see a
long-term
flattening-out in demand for many refinery products, and this has
led to the downward revision in future refinery capacity needs. A
number of expansion projects announced over the past few years have
been canceled. Moreover, a sizable share of this year's outlays are
for pollution-abatement equipment rather than for expanding
production facilities.
Although steel manufacturers are planning large capital outlays in 1976, most spending will be to comply with EPA guidelines, rather than for much needed improvements in production facilities. The District's largest producer, for example, will not spend anything for "productive purposes" this year but will continue to spend $1 million a month for pollution-control equipment. A Fort Worth mill scrapped plans for a new furnace but will lay out $3 million for pollution-abatement equipment.
A recent severe cold snap forced natural gas utilities to cut off supplies to low-priority industrial users throughout a wide area of the Southwest. Gas supplies to high-priority customers, such as residential and commercial users, were largely unaffected, although schools were forced to close in one large service area. Almost all of the industrial plants affected by the cutback in gas service were able to switch to standby energy supplies, and very few facilities opted to shut down their operations temporarily. With a return to more seasonable temperatures, full gas service was restored to all customers.
Placements of calves in Southwestern feedlots were up nearly 50 percent in late 1975 over the level of the year before. But bankers engaged in financing cattle feeders expect placements to fall throughout the first half of 1976, because feed cattle prices have continued to edge downward since mid-1975. In the past, declining prices would have only a modest effect on placements, since many feeders would speculate that prices might improve while their calves were on feed. But following the turbulent developments in the industry during the past two years, cattle feeders and their bankers are much more cautious. A shortage of feeders' calves is also expected to hold down future placements. Fall and winter grazing has been extremely limited, forcing ranchers to market or slaughter calves earlier than normal and thus laying the foundation for the future shortage.