April 12, 1978
The return of warm weather has quickened the pace of economic activity in the Eleventh District, according to the Directors and businessmen interviewed in this month's survey. Spring sales at department stores and auto dealerships are up sharply, and the goods-producing industries show advances following a lackluster performance during the first quarter of the year. There is concern among many respondents, however, that residential construction may weaken as deposit inflows continue to slow at both savings and loan associations and. banks. Much of the current strength in business loan demand is attributed to a growing number of plant acquisitions and business takeovers. Although financial conditions of farmers remain tight, price increases have improved the situation for ranchers and dairymen.
The pace of consumer spending during the first weeks of spring has surpassed the expectations of many retail executives. Department stores reported excellent Easter sales. Some off the sales gains, however, were due to promotional efforts by retailers trying to draw down high inventory levels accumulated during the cold winter months. Many stores now find themselves slightly understocked. Department store executives say that sales are expected to remain strong through the summer. Auto dealers describe recent sales as "exceptional." Domestic and foreign cars of all makes and sizes appear to be selling well, and inventories are generally below desired levels—especially stocks of foreign cars.
Output in the goods-producing industries picked up in mid-March with the return of warm weather. The largest gains are in mining and construction, but only moderate gains are reported by the industries supplying the mining and construction industries. During the winter months, many suppliers did not reduce production levels to match a slackening in new orders. Consequently, manufacturing activity will not rise in step with the recent increase in bookings.
Aided by the trigger price system, domestic steel producers report a growing demand for their products. Some producers are optimistic that trigger pricing will enable them to pass on production cost increases more easily and thus improve their profit margins. Inventories of scrap are below desired levels, and scrap prices are expected to continue to rise. Sand, gravel, and cement plants are allocating output to users because of the strength in construction activity. One respondent believes that residential construction may have reached a peak, but increased nonresidential construction activity is expected to take up any slack that may develop.
Increased concern over inflation and talk of recession is discouraging some firms from making new plant and equipment expenditures. Oil-related industries and electronics firms continue to account for much of the plant and equipment spending, while many outlays are for pollution control equipment or plant modernization. Investments by oil-related firms are said to account for nearly half of all plant and equipment expenditures in the Houston area.
In nondurable goods manufacturing, the growing popularity of suburban newspapers and regional magazines continues to account for much of the increase in printing and publishing. Petroleum refiners report that the seasonal increase in inventories of gasoline is well along, and many have begun to post price increases in advance of the summer vacation season. Chemical production continues to grow at a moderate pace, but capacity utilization remains slightly below 90 percent at most plants. The apparel industry may be getting a boost if the activity at the early fall market of the Dallas Apparel Mart is an indicator. Buyers report orders are up 10 to 15 percent over last year.
Net savings inflows at District S&Ls are running 50 percent below year earlier levels. S&Ls are expecting a real test this month when a block of "wildcard" certificates matures. Increased advertising of large certificates of deposit is being used to attract funds. The demand for mortgage funds continues to outpace the supply of new funds as rising mortgage rates have slowed demand only slightly, One major S&L recently raised its conventional rate to 9 3/4 percent, but most continue to hold to 9 1/2 percent.
Deposit inflows at banks also continue at a slow pace. Many bankers report demand deposit and savings accounts are declining, while certificates of deposit remain strong. Liquidity remains adequate, and asset growth has not been adversely affected by the slower growth in deposits. Some large banks report increasing their holdings of municipals, and loan growth continues strong, particularly real estate and construction loans. Commercial and industrial loans also continue to grow at a fast pace with much of the growth attributed to a growing number of plant acquisitions and business takeovers.
Financial conditions of Eleventh District farmers remain tight, but higher cattle and milk prices have improved the situation for ranchers and dairymen, according to preliminary findings of our April survey of agribankers. Although the availability of loanable funds at rural banks increased slightly since January, repayments of outstanding loans remain slow, and referrals to nonbank credit agencies continue to edge upward. Several bankers note that because of dry weather and low crop prices more farmers and ranchers are starting the 1976 crop year with a higher volume of carryover loans than has been experienced before.