August 9, 1978
Directors and businessmen surveyed this month report only minor changes in the strong rate of growth in economic activity in the Eleventh District. However, the outlook of the Directors is clearly pessimistic, as they see the high rate of inflation and tighter credit conditions leading to a sharp economic slowdown. A recent slowing in sales appears to have been caused by the oppressive effect of very hot weather on consumers' buying moods. Nonresidential construction activity, on the other hand, is increasing sharply. And home sales remain strong enough to keep mortgage rates high despite some improvement in savings inflows to savings and loan associations recently. Manufacturing activity continues to climb, although it is much less robust than a few months ago.
Directors of this Bank are of the opinion that a significant slowing in the national economy is in the offing, although they see the possibility of a recession as small. They indicate that given the anemic Government efforts to slow the rate of inflation, the rise in prices is likely to continue unabated. Interest rates are also expected to rise further, reducing residential construction activity and business fixed investment. The regional economy, however, is expected to fare better than the nation because of the influx of people and new firms into the Southwest.
Nonresidential construction is the fastest growing sector of the southwestern economy. Plant expansions and new plant construction by manufacturers are increasing sharply. Construction of power stations, public projects, and office buildings are also adding substantially to total contracts. The amount of office space under construction in the Dallas area has more than doubled since February to nearly 6.5 million square feet. Residential construction activity remains strong, although higher prices and mortgage rates are cutting into sales of new homes.
The expansion in construction activity is hampered by shortages of cement, but surprisingly, prices have remained fairly stable. Recently, one major supplier attempted to raise prices but failed as other firms refused to follow suite. Imports of cement from Mexico are easing shortages in some areas, and there are several new cement plants under construction in Texas. Prices of other building materials in short supply are responding to the demand pressures.
Demand for real estate and construction loans is leading the rise in lending activity at commercial banks. Some of the recent real estate loans were to applicants turning to banks because S&Ls were unable to meet their requests. Banks are becoming increasingly concerned about their liquidity positions. Loan volume at District banks is running well ahead of budgeted levels, and 20- to 30-percent gains in loan volume from year-ago levels are not uncommon. Substantial volumes of loans are being "laid off" to banks outside the District. Deposit growth, on the other hand, has been modest and not nearly fast enough to keep up with the growing demand for loans.
Deposit inflows to District S&Ls continue to run behind those of a year earlier, although some pickup in savings inflows was noted recently. Sales of mortgages in the secondary market are still low, although some portfolio managers are discounting low-yielding mortgages in order to replace them with higher-yielding mortgages. Mortgage demand continues strong, and mortgage rates remain near the 10 percent usury ceiling. Down payments of 25 to 30 percent are required by some S&Ls in Houston and San Antonio, and other nonrate requirements remain restrictive. A few S&Ls in the Dallas-Fort Worth area, however, are finding it necessary to reduce some of their lending requirements. One major S&L, for example, recently lengthened its commitment period after finding mortgage demand weakened beyond its expectations.
Manufacturers continue to complain of rising labor and energy costs. Most are able to pass these costs on to their customers, but some industries, such as copper producers, are unable to pass costs on because of weak demand. One copper company recently announced a price hike but predicts that copper prices will go down in the months ahead. Plant utilization in the industry is running between 70 and 75 percent of capacity, and new orders are expected to rise only moderately. Prospects are much better for other durable goods industries where backlogs of unfilled orders are increasing, and expansions in productive capacity are planned. Firms supplying the construction and drilling industries continue to do well, and sheet metal firms also report strong sales and a continuing rise in new orders. Outages of major Gulf Coast refineries have reduced available gasoline supplies, and as a result, are keeping pressure on wholesale gasoline prices.