January 13, 1977
The rate of economic recovery in the Eleventh District has slowed. Manufacturing output is down slightly, and the unemployment rate has risen to 6.2 percent after two months of decline. Total employment, however, continues to climb, and the oil and gas industry in Texas is being buoyed by increased drilling activity. A survey of the directors of this Bank and agribankers was conducted this month. The results show that economic growth in the Southwest in 1977 will be bolstered by further increases in construction activity and steady improvements in manufacturing output, which should stimulate business fixed investment. Bankers report farmers are in a severe cost-price squeeze, and demand for loans is strong.
The majority of directors are optimistic about the economic outlook for the nation and the Southwest. One indicated that the outlook will be largely dependent upon the extent and timing of proposed government actions. Another predicted that once business and consumers are given "good economic signals," the economy will pick up significantly.
Stronger than anticipated retail sales in December are being interpreted as slightly bullish for 1977. Moderate to strong growth in retail sales is expected in the District this year, which should reflect continued improvement in consumer confidence and growth in disposable income.
Homebuilding will continue to be a major source of strength in the southwestern economy. A strong stimulus to more housing is an abundant supply of funds that is now exerting downward pressure on sticky mortgage rates in many areas. One director predicted new starts will rebound faster across the nation than most analysts anticipate—certainly well above 1.6 million units.
Industrial production is expected to show steady improvement throughout this year. Businesses are expected to continue the strategy of a gradual accumulation of inventories. Shortages of materials are not anticipated, and overall productive capacity is adequate to accommodate the expected increase in output. However, the rise in capacity utilization should be sufficient to stimulate a new wave of capital spending. But as one director points out, major capital outlays will be deferred until business determines exactly what direction government policy is headed.
Overall loan demand is not expected to increase significantly until the pace of economic recovery gathers more momentum in the second half of the year. One director estimates the pickup will begin in approximately two months as firms start to finance inventory accumulation, and another predicts that business loan demand may climb 7 to 8 percent. Foreign loan demand is expected to be strong, largely due to recent oil price increases by OPEC.
Most respondents indicated that short-term interest rates would ease down a bit more before reaching bottom. A turnaround will likely occur sometime this quarter, as inventory accumulation develops momentum. Short-term interest rates are expected to rise 1 1/4 percentage points above current levels by year-end. According to some directors, the prime interest rate will range from 7 to 8 percent by late 1977. If the pace of economic activity accelerates suddenly, one director predicted that short-term interest rates could rise much more sharply.
Agribankers, responding in the latest quarterly credit survey, report that the financial conditions of many grain producers and cow-calf operators have weakened in the Southwest. A banker in the High Plains of Texas notes that high costs of production and low prices for corn, grain sorghum, wheat, and cattle have placed producers in a severe cost-price squeeze. Another banker indicates that wheat prices are below costs of production, and corn and grain sorghum prices are at break-even levels. Farmers are optimistic about the outlook for cattle prices but are less encouraged about grain sorghum, wheat, and corn prices. High prices and generally favorable yields, however, have enhanced incomes and have improved the equity position of most cotton and soybean producers.
Demand for farm loans is strong. Operating expenses and machinery prices have risen somewhat, and the volume of crop storage loans is up as farmers withhold grain from the market for higher prices. The number of renewals and extensions has increased, particularly in major wheat producing areas.