Beige Book Report: Dallas
January 11, 1978
Business activity in the Eleventh District enters the new year on a note of strong economic expansion. The businessmen and Directors surveyed this month are optimistic about future business prospects. Christmas sales exceeded the expectations of many department store executives, and the outlook for future sales is bright. Auto dealers expect sales of 1978 models to be greater than 1977 models. Bankers report deposit inflows have slowed but do not see disintermediation becoming a serious problem. The booms in drilling and construction continue, with heavy demand for inputs to the two activities. The financial position of the agricultural sector is being squeezed by low crop prices.
The Directors surveyed this month generally agree that the pace of economic activity for the Southwest and nation will quicken in 1978. However, they all express concern that many of the economic and political uncertainties that discouraged capital investment in 1977 are still present. Only one Director expects that many of these uncertainties will be resolved and that business spending will move from the "maintenance" expenditures that characterized capital investment in 1977 to a greater emphasis on expanding productive capacity this year. Most respondents see little improvement in the national rate of unemployment and are forecasting a jobless rate of 6.5 percent by year-end 1978. Interest rates are expected to show only moderate changes in 1978--rising in the near term and falling by year-end. A small majority of the respondents thought that the rate of inflation would increase moderately rather than abate.
Department store sales in the Eleventh District ended 1977 on an upbeat with Christmas sales substantially above the expectations of most merchants. Inventory levels were drawn down to low levels at many stores, and the clearance sales now underway are relatively small in volume. Most department store executives forecast increased sales for 1978. Some respondents feel, however, that part of the exceptionally high level of Christmas sales reflected advanced buying by customers and are predicting that sales this quarter may be weaker than they otherwise would be.
Although new car sales have slowed somewhat, auto dealers continue to express confidence that sales in this model year will exceed last year's level. Sales of intermediate-sized cars are especially slow. Inventories of domestic cars are above desired levels for most dealers. Foreign car dealers seem to be doing slightly better than domestic dealers in spite of recent price increases on foreign cars, and some Volkswagen dealers report that inventories are below desired levels.
At current interest rate levels, bankers report funds are being transferred out of demand and savings deposits and into certificates of deposit. Most do not expect disintermediation to become a serious problem. However, banks are having difficulty attracting new deposits, with consumer saving deposits especially weak. Demand for construction, real estate, and consumer loans continues to increase in the District, and demand for those types of loans is expected to remain strong throughout 1978.
Drilling activity is at an 18-year high, and drilling contractors anticipate continued expansion in 1978. Because of the high level of activity in the industry, the supply of oil field equipment is tight. The lead time required to deliver most equipment has doubled since last spring. A short supply of drill pipe is hampering some activity, but the problem is not acute. To meet demand, many oil field machinery and equipment manufacturers are currently expanding or plan expansions of their production facilities in 1978. One respondent plans a $6 million expansion that will add 600 new jobs.
The increase in construction activity in the District is also leading to greater output in several durable goods industries. Cement producers are expanding their operations to meet the increased demand for their products. Demand by construction contractors for metal buildings to store equipment and materials is increasing output in the fabricated metals industry. In addition, fabricated metal manufacturers report strong demand for solar panels and aluminum doors and window frames.
According to our latest quarterly survey of agribankers, reduced cash flows from low grain and cotton prices continue to squeeze the financial conditions of farmers. As a result, repayments of loans remain slow at rural banks, and the availability of loanable funds has decreased since October. Participations with nonbank credit agencies continue to rise. One banker noted that "many farmers will have to refinance long-term debt to meet operating and machinery loan obligations." With commodity prices at low levels, a large portion of the 1977 crops will be placed under the Commodity Credit Corporation loan program. Higher cattle prices and more profitable feeding margins account for much of the increase in feedlot placements. But dry weather and poor winter grazing conditions continue to force many cow-calf operators to cull herds. The farm "strike" movement appears to be gaining support, with the strongest backing in the grain-producing areas in West Texas.