February 11, 1976
Large commercial banks in the District report that lending activity continues at a lackluster pace even though loan officers have become more aggressive in seeking new customers. As a result, they expect only a moderate recovery in bank loans in 1976. Total loan volume should only increase between 7 percent and 10 percent with petroleum loans—especially to finance oil field operations—and consumer installment loans leading the recovery. For the largest banks, foreign lending should also continue to increase, as these banks attempt to offset the sluggish recovery in domestic loans.
Consumer installment lending, paced by new car sales and home improvement loans, has increased steadily since last fall. Credit card use is also on the rise. Moreover, credit card delinquencies and demand for debt consolidation loans are down sharply from their peak levels early last year, indicating household finances are much improved. Bankers are aggressively marketing consumer loans, trying to keep this market strong throughout the year to help offset slack demand for other loans.
According to most loan officers, business continues to be reluctant in rebuilding inventories. Although retailers are replenishing stocks in expectation of a record sales year in 1976, manufacturers and wholesalers, for the most part, are keeping their stocks near last year's low levels. Nevertheless, nearly half the bankers surveyed said a number of manufacturers are currently reevaluating their inventory policies, and as a result, borrowing may pick up in the spring.
Bank loans to small businesses for equipment and plant expansions are also sluggish. Many of these firms have cut back their capital spending plans until they can build liquidity. Moreover, Houston bankers say the major oil companies are facing uncertainties that will keep new capital requirements below the level of last year's spending.
In addition, the reluctance of bankers to make term loans last year to bail out firms with weak working capital positions has resulted in these firms turning to other sources of funds. Asset lenders in particular are reported to be doing a brisk business at interest rates in the neighborhood of 6 percentage points over prime.
Real estate lending is increasing, but loan officers say the cautious rise in lending activity is far different from the speculative pace of a few years ago. Sales of single-family homes are providing most of the strength. Bankers note that large holdings of non-income producing land by both banks and REITs continue to hold down real estate lending.
More on the positive side, bankers expect a revival in business acquisition lending in the near term. A Dallas banker, for example, said he is receiving an average of two inquiries a week from large firms looking for small businesses as candidates for acquisition.
Rural bankers report demand for farm and ranch credit is strong. With rising costs of production and more intensive irrigation due to dry weather, demand for crop operating loans is up sharply. And, as a result of declining grain prices, crop storage loans have risen. Also, farm machinery loans have increased due to substantially higher prices for tractors, machinery, and equipment.
Livestock lending has strengthened with more feedlot placements and increased supplemental feeding of cattle on ranges and pastures. In addition, lending for dairy operations has picked up as that industry has responded to lower feed costs and higher milk prices. However, demand for stocker cattle for winter grazing on wheat and oats is below normal because of the lack of rainfall and deteriorating forage conditions.
Agribankers indicate that many farmers and ranchers in the District are having problems repaying loans. Farm and ranch income has been weakened by depressed grain and cattle prices, rising production costs, and poor moisture conditions. As a result, loan renewals and extensions are running well above normal.
The Texas labor market continues to improve as the unemployment rate in the state has dropped below 6 percent. The number of jobholders in the state is slightly higher than the level a year ago, paced by a gain of nearly 10 percent in mining employment. This reflects the boom level of oil field drilling. If legislation is enacted to partially deregulate natural gas prices, new hirings in this sector are expected to continue to increase.
Construction employment is the weakest sector in the labor market. In the Dallas-Fort Worth area, many large companies have been making greater use of industrial workers for plant construction, reducing employment opportunities for union members in the building trades. Already, jobless rates in some organized building trades are running 30 to 40 percent. As a result, union bricklayers, operating engineers, and laborers in the North Texas area have agreed to pay cuts of around 30 percent to help union contractors compete for construction bids against open-shop rivals. And in El Paso, many building tradesmen are pocketing their membership cards and are hiring out to nonunion contracts.