Beige Book Report: Dallas
June 16, 1976
Despite a steady decline in mining output since November 1973, industrial production in Texas has recovered to a level near the pre-recession peak. Manufacturing output has more than made up for the ground lost during the recession. The recovery in output, however, has largely been centered in the production of nondurable goods. Output of chemicals, oil refining, and apparel has fully recovered, while paper production has been slower in recovering. In durable goods production, which has not fully recovered, the strongest industries are fabricated metals and nonelectrical machinery. The weakest continues to be primary metals.
This month's survey found no production bottlenecks of consequence, and factory inventories were at manageable levels. Manufacturers look to improved business conditions but at the same time remain reluctant in most industries to expand production capacity beyond what they now have or what is currently under construction. Their major concern is the future strength of the recovery, but also important are future environmental guidelines that will affect business decisions.
Output by the chemical industry in Texas has surpassed the 1974 prerecession high, and new production records will likely be set for some items this year. Supplies of such basic chemicals as ethylene, propylene, butadiene, benzene, toluene, and xylene are readily available. No production bottlenecks are anticipated by the industry as output rises, but a couple of potential problems are being monitored. Plants dependent upon natural gas liquids for feedstocks may have to look harder for their inputs by year-end, and the rubber workers' strike and a delayed recovery in the market for rubber products are slowing the output of butadiene. A firming in chemical prices has improved prospects for industry profits, and plans are made to expand capacity in a number of areas. A chemical engineering consulting firm notes, however, that plant expansions could be hampered by shortages of castings.
Inventories of agricultural chemicals are high, and production has been cut until stocks are reduced to more manageable levels. A major producer states that ammonia, potash, and phosphate are now selling near producers' costs. With inventories high, the Texas-based company has closed down one of its phosphate plants in Florida. Prices for agricultural chemicals are expected to remain weak, and only if there is a significant increase in fertilizer exports would prices move up.
Apparel production in Texas has recovered to the prerecession level of output. Most plants are operating at 100 percent of capacity, and many firms have given as much as 20 to 25 percent of their current business to apparel contractors. The busiest firms have experienced two- to four-week delays in receiving the more popular piece goods. But some signs of softening in the apparel market have been noted recently. The fall market for women's clothing, held in Dallas in May, was rated as only "fair" compared to earlier markets that were "hot." And although the sales of men's slacks continued strong, demand for leisure jackets has weakened. Apparel manufacturers are not planning significant increases in plant capacity this year.
Paper production appears to be the weakest industry in nondurable goods manufacturing in Texas. A major producer, however, states business is relatively good, as the rate of capacity utilization has increased to 85 percent from a low of 70 percent. There are shortages of Kraft paper and linerboard. Raw materials costs are going up at a 10-percent annual rate, but some softening in prices is expected this year. Plant expansions are likely in some segments of the industry, but everyone seems to be hedging their positions until future economic conditions can be more clearly ascertained.
Production of color television sets should continue to increase rapidly. In light of current demand projections, a major manufacturer plans to increase production of subassemblies by one-third at its border plant in Cuidad Juarez, Mexico. Employment at the plant stands at 3,800 workers, up from a recession low of 2,400. The higher level of production would mean a 10-percent increase in the number of workers on the first shift and a doubling of the second shift. No production bottlenecks are anticipated, but some deterioration in the quality of ceramic capacitors purchased from far eastern suppliers has been noted. The failure rate of these components is expected to decline, however, after foreign manufacturers adjust to higher production levels.
Production of primary metals is running a little above the recession low. Most metal plants are running 75 to 80 percent of capacity, but there is more strength in steel tubing used in drilling. The weak construction market continues to hold down production of steel, aluminum, and copper. Structural steel firms are concerned that no new highway construction contracts are being let in Texas, and one aluminum smelter has remained idle since last summer due to high energy costs. Few additions to capacity are seen in this industry. A couple of new energy-efficient steel and aluminum plants are coming on-stream to replace older plants, and a large diameter steel pipe mill is to be constructed by 1978. Other investment outlays planned are to meet the EPA's 1978 standards, which in the case of one copper plant will exceed the value of its present facilities. A potential bottleneck is the future market for scrap steel. World demand for scrap is soft, but should it firm before construction activity recovers, scrap prices could rise to unprofitable levels for some structural steel manufacturers.
Despite a sharp four-month decline in the number of active drilling rigs, the outlook for drilling remains optimistic. One major equipment supplier feels that, with the exception of last year, total activity in 1976 could be at the highest level since 1962. Output of oil field equipment is holding up, although current production of oil rigs is coming largely from the backlog of unfilled orders. Because of the slack in new orders, production could be affected by next year. Demand is strong, however, for such items as handling equipment, high pressure valves, and "fishing" tools. The oil field equipment industry has no plans to increase capacity and, like the mining sector, is waiting for Congress to outline a national energy policy which would determine much of the future course of production.
A survey of the transportation equipment industry found a wide range of capacity utilization rates among major segments of the industry. The District's only auto assembly plant—a producer of intermediate-size cars—is running a six-day week. That workweek was established in February by an expanded overtime schedule that required hiring few new employees. The only bottleneck being experienced is a shortage of tires which requires new production units to be delivered without spares. A helicopter manufacturer is experiencing a slackening in nonmilitary sales and, as a result, has permitted its work force to decline 4 percent through attrition. Aircraft sales are expected to firm by year-end, but no additions to capacity are planned.