Beige Book Report: Dallas
April 12, 1977
The pace of the economic recovery in the Southwest continues to pick up. Although the unemployment rate for the District states edged up to 5.8 percent, total employment continues to climb. Drilling activity in Texas is at a 15-year high, and production of oil field equipment is on the upswing. New orders for apparel have picked up, and output is beginning to rise. Total loans at the District banks have decreased since January because of a moderate decline in business loans. Real estate and consumer loans, however, have continued to advance sharply. Steadily increasing costs of production are pushing up agricultural loans.
Drilling activity in Texas continues to rise, but production and proved reserves of oil and gas continue to decline. Most of the drilling is in low-yield, shallow fields. The supply of idle drilling rigs has dropped to a comparatively low level, but there are apparently no serious equipment shortages. The number of rotary rigs in operation is at the highest level in over 15 years and is nearly a fourth above the level a year ago. Few onshore rigs are idle, and they are mostly deep-well rigs located largely in West Texas. There is strong demand for offshore rigs used in shallow water, while many deep-water rigs remain idle. Demand for drilling crews is increasing, but there are no indications of a shortage of labor.
Reflecting the higher level of equipment utilization, demand for oil field equipment is climbing steadily. Oil field equipment manufacturers expect a strong improvement in sales in 1977 over last year. Better terms of financing, as well as increased business, have spurred many drilling contractors to order new equipment and retire older machinery. With the upswing in production of machinery and drill pipe, prices for equipment have also begun to rise sharply.
Apparel production, which suffered a sharp downturn last year, is starting to show signs of improvement, as indicated by a pickup in new orders. Manufacturers of men's clothing indicate sales this year will be greater than in 1976, but they continue to be very cautious in making sales forecasts. According to observers at a recent showing of women's and children's early fall merchandise at the Dallas Apparel Mart, demand was strong for sweaters and coats. Inventories of these items were drawn down sharply last winter, and retailers appeared to be building ample stocks in anticipation of another cold winter. That buying pattern leads many observers to believe new orders for other winter garments will be up substantially during the next big market in May. Manufacturers estimated that retail prices for fall merchandise would be 10 to 12 percent higher than last year, and those estimates did not take into account higher labor costs that would stem from an increase in the minimum wage.
Total loan demand at District member banks has declined since January. Virtually all of the decrease has been in business loans, and bankers expect only a small to moderate pickup in business loan demand this year. Real estate loans continue to strengthen with further recovery in the construction industry. Consumer loan demand is expanding sharply, reflecting rising consumer confidence. Auto loans are particularly strong, and credit card usage is also up. One bank in Dallas reports the level of credit card debt outstanding has remained near the Christmas peak, and normally it would have run down by $8-9 million by this time of the year.
The inflow of time and savings deposit funds to District banks remains strong, and bankers have not attempted to slow the inflow by reducing interest rates paid or changing other terms on time deposits. Because the supply of loanable funds continues to grow, more banks are becoming more aggressive in seeking new loans or loan participations. Moreover, banks are increasing their holdings of various types of government securities—especially municipal bonds.
Agribankers indicate that reduced cash flows from low grain and cattle prices, coupled with the rising costs of production, continue to adversely affect agricultural credit conditions in the Southwest. At current grain prices and with "normal" weather, only the most cost-efficient farmers will make a profit this year. Drought conditions and rising costs of energy are increasing irrigation costs in the grain-producing northern High Plains of Texas and are leading to greater demand for operating credit. Conversely, cotton and soybean producers in the southern High Plains are faring much better. They experienced a good year in 1976 and are reported currently to be increasing purchases of machinery.
Reduced cash flows and larger lines of operating credit have caused loan-to-deposit ratios at rural banks to rise. Renewals and extensions of loans are also increasing, particularly in the intensified wheat-producing areas of the High and Rolling Plains of Texas. The supply of loanable funds to meet credit needs has declined somewhat in the area mainly reflecting low wheat prices. Bankers continue to maintain firm collateral requirements and are taking a closer look at the credit worthiness of their customers. The number of referrals to nonbank credit agencies is rising sharply. Although the supply of loanable funds has declined, few member banks have used the seasonal borrowing privilege at the discount window this year, as the discount rate still remains well above short-term interest rates.