Beige Book Report: Dallas
December 15, 1976
Most regional economic indicators point to further strength in the Southwest economy. Business loan demand at large District banks, however, is expected to continue weak, with further downward pressure on interest rates. Oil and gas production continues to decline, but drilling activity and employment and income in the industry continue to rise. Demand for labor continues to grow. Unemployment is declining, and the unemployment rate for the five states of the Eleventh District is down to 6.0 percent. A recovery in construction activity appears to be taking hold in multifamily housing and nonresidential building. A survey of department stores found Christmas sales to be strong, and auto dealers reported further growth in new car sales. Moreover, manufacturing output should continue to grow at a moderate rate next year.
Department store sales are showing strong improvement. Almost all retailers interviewed are optimistic about the prospects for robust Christmas sales, and early indications seem to support their optimism. Only at stores in border cities that cater to Mexican nationals is business off substantially. Sales of both hard goods and soft goods are reported to be strong. High-priced merchandise is moving extremely well. Retail inventories are at desired levels and in line with the anticipated volume of Christmas sales. A major Dallas retailer stated that his inventories are at their best level in three years. A director with a large nationwide group of department stores reported a very conservative outlook for first quarter 1977 with improvement in the second quarter.
Automobile sales in the District are up moderately, but sales in Houston are at the highest level in three years. Demand for small cars remains weak, while sales of intermediate- and full-size cars continue to strengthen. Also, fleet demand remains strong, and sales of vans, trucks, and jeeps are brisk. GM and AMC dealers indicate that the rebate programs on subcompact models increased sales only marginally. Dealer inventories of full- and intermediate-size models are low, while stocks of small cars remain high. But nearly all dealers report that inventories are gradually being brought into balance. Some Houston dealers, however, cite overall inventory levels are 30 to 50 percent lower than they would like.
Manufacturing output in Texas continues to increase in most major industries. However, output of petroleum refining; paper products; and stone, clay, and glass products has weakened. A Houston economist notes that durable goods production has been gaining momentum in that area. And coupled with the high level of output of nondurables, further gains in production should stimulate increased capital spending in a few months.
The future increase in production by the Southwest's largest industrial complex, petroleum refining and chemicals, could be influenced by the anticipated price increase by OPEC. Most observers expect an increase of 10 percent, which would lead to a one cent a gallon increase in gasoline prices. However, there are differences on the anticipated timing of the price hike. Some respondents expect no immediate increase in oil prices but felt the increase would certainly be imposed in the next six months. In any case, output by the complex is expected to rise next year and may push existing production capacity in some product lines.
Recovering from a slump earlier this year, the number of active oil drilling rigs in Texas has risen to the highest level in 17 years. Despite the high level of drilling activity, production of oil field equipment has weakened. New orders have fallen as drilling contractors, faced with higher equipment prices and increased financing problems, are content to work their current inventory of rigs more intensively. As a result, production of oil field equipment next year probably will be geared largely to the replacement of older equipment.
Production of primary metals is rising on relatively strong demand for aluminum. Demand for steel and copper remains weak. Output of steel, however, is expected to increase by next spring, but copper production will remain little changed for most of next year. Moreover, a high level of copper inventories will have to be run down before production can be stepped up. Aluminum producers see a gradual increase in product prices, while a Fort Worth steelmaker expects prices of ferrous metals to remain soft. Another steel producer thought the recently announced 6-percent increase in prices for sheet steel would not hold.
The recovery in construction activity is beginning to spur the demand for lumber in Texas. Current inventory levels of lumber range from "adequate to low." And lumber prices have climbed to the high levels that prevailed four years ago, according to a lumber brokerage firm. A Houston company anticipates that the demand and prices for lumber will continue to move up in the next six months.
In mining, production of oil and gas continues to decline, but drilling activity has rebounded sharply from a low last June. Drilling in Texas has surpassed the peak level of output attained a year ago. In uranium mining, one District state—an important producer—is considering a large increase of its tax on "yellow cake."
Grain sorghum prices have fallen substantially in recent months. And in response to lower feed costs, the number of cattle placed on feed is up in the District's major feeding areas. Pressured between high production costs and low prices, grain farmers are reported to be "in trouble" and may press vigorously for higher price supports.