Beige Book Report: Dallas
June 14, 1978
Directors and businessmen interviewed this month report further advances in Eleventh District economic activity. Initial response by the public to the new six-month time certificates has been favorable, although initial sales were less than expected. Banks and thrift institutions see the new certificates as an effective way of retaining current savings. Material shortages continue to cause bottlenecks in construction activity in the district. Labor remains in tight supply and is constraining production in some industries. Retail sales are posting strong gains, but retailers attribute some of the strength to advance buying by customers. Manufacturing activity continues to expand, but there are signs of slowdowns in new orders in some industries.
In response to an advertising blitz in newspapers and on radio and television, public interest in the new six-month time certificates has been heavy, but sales during the first week of issue were somewhat short of expectations. S&Ls appear to be marketing the new time certificates more vigorously than banks. In fact, some large banks have made only minimal efforts toward selling the certificates. Maximum allowable interest rates are being offered at compounded rates by most of the banks and S&Ls surveyed, and nearly a third of the new issues sold represent inflows of new savings. Banks that are not advertising the new certificates are finding that a much smaller percentage represents new savings inflows.
Banks and thrift institutions have reduced advertising during the second week of issue and plan to resume heavy advertising only when they begin to lose deposits. Bankers, in particular, are reluctant to make the new time certificates an important source of funds, as most expressed satisfaction with their current liquidity position and see the new certificates as adding to the cost of funds without providing additional benefits. But these banks feel compelled to offer the new certificates to remain competitive with other institutions whose currently weak liquidity positions warrant issuing the new certificates. S&Ls pressed by continuing strong mortgage demand and declining savings inflows, find the new certificates more attractive than banks. The increased ability to retain savings, plus drawing in additional savings, appear to offset the added costs of funds in the judgments of the majority of S&L executives surveyed.
Banks and S&Ls agree that the money going into the new certificates is highly interest-rate sensitive. Several respondents predict money market rates will decline late in the third quarter and the new certificates will play only a minor role in savings flows by next year.
The strong pace of economic activity in the district has produced relatively few shortages or bottlenecks. Most of the material shortages continue to be in the construction industry. The shortage of cement is acute, and available supplies of concrete are being allocated to customers and Monday deliveries have been discontinued. The price of concrete in Dallas is currently $35 a yard, up from $30 in January, and is expected to rise to $40 a yard by the end of the year. Shortages of sand, gravel, sheetrock, and insulation have also lengthened the time required to complete some projects. Most of the shortages faced by the construction industry have existed for several months now, and construction firms have coped with them through careful planning and ordering materials well ahead of schedule.
Labor shortages persist in construction and other industries. Welders, machinists, and mechanics are reported in short supply by fabricated steel producers, oil field equipment makers, and shipbuilders. Shortages of adequately qualified unskilled labor are also frequently reported by employers, especially in Dallas and Houston.
The only equipment shortage of note is for drilling rigs. A shortage of rail cars, especially hopper cars, continues to slow deliveries of some agricultural and manufactured products, but the railroads say the problem is only temporary.
Retail sales are "excellent" and are running slightly ahead of expectations according to department store executives. Apparel sales at many outlets have been sufficiently strong this quarter to offset the first quarter's poor performance. However, some executives attribute much of the increase in department store sales to advance buying prompted by prospects of higher prices. Many retailers believe that the current strength in sales will not carry over into the second half of the year, largely because of the high and rapidly rising level of consumer debt, and year-to-year sales gains will begin to slow in coming months. Inventories at stores are currently near desired levels.
Manufacturing output continues to expand, but some industries report a softening in new orders. Bookings for fabricated steel buildings are slowing because many small businesses are having difficulty securing mortgage money to make these purchases. Fabricated metal manufacturers, however, continue to operate at full capacity and still have large backlogs of orders.
There is widespread feeling, especially among the directors of this bank, that prices are rising much faster than the WPI and CPI suggest. With prices of many goods rising very sharply, it is difficult to discern what commodity prices are rising at slower rates than the overall indexes.