November 15, 1978
Business activity continues to advance at a moderate pace in the Eleventh District, according to the Directors and businessmen surveyed this month. Savings and loan association officers are responding to higher short-term interest rates by raising mortgage rates and tightening other mortgage loan requirements. Bankers report a weakening in real estate and consumer loans, but total loan demand continues strong. It appears that the strength of consumer spending is waning slightly, but sales are expected to remain strong through the Christmas season. Manufacturing output has slowed in some industries but overall continues to make moderate gains. Shortages of both skilled and unskilled labor persist.
Pinched by the rising cost of funds, District S&Ls require a 20-percent down payment and have raised the mortgage rate to 9 7/8 percent. Money market certificates of deposit account for about 40 percent of new savings. So far, S&Ls have not diverted significant amounts of funds from mortgages to alternative investments, which are becoming more attractive.
Rising interest rates are changing the composition of loan portfolios at District banks, but the higher rates have not curtailed total loan demand. Real estate and consumer lending are expected to slow further with continued rises in interest rates, but large banks expect commercial lending to national firms will pick up as those firms shift from the commercial paper market to banks. Liquidity remains adequate, although the growth in deposits is slow. Because of its high costs and narrow appeal, automatic transfer of savings is meeting a sluggish response from customers. Banks in general are making minimal efforts to promote ATS.
Many farmers in the District are holding corn and other feedgrains in anticipation of higher prices. Demands for crop storage and farm operating loans, combined with the rising cost of funds, are causing problems for some rural banks in Texas and New Mexico where interest rates on loans to individuals have reached usury ceilings. Several banks are making loans only to their best customers and are referring marginal borrowers to nonbank sources of funds.
Department store sales remain well above a year earlier, but some of the underlying buying strength of earlier months appears to be absent from recent sales figures. Current sales are being aided by sales promotions designed to reduce inventory levels at some stores. The management of one chain store expects a mild recession to occur next spring.
Retail buyers attending a recent market of women's apparel at the Dallas Apparel Mart were cautiously optimistic about sales prospects next year. Because wholesale prices are up sharply from a year ago, buyers were acutely price conscious. Higher quality garments in the middle price ranges sold particularly well. Most retailers indicate inventories remain at manageable levels, although late fall deliveries of woolens pushed stock levels up suddenly at some outlets. Silk and leather are reported to be in short supply.
Auto sales are on par with a year earlier at most dealers. Plymouth and Dodge dealers, however, are reporting 10- to 15-percent declines in sales from a year ago. Some price resistance is noted, but big, fully equipped cars are selling especially well. Inventories of the most popular models are below desired levels at both domestic and foreign car dealers.
Manufacturing activity continues to make moderate gains. Production in the computer and electronics industries continues very strong as these firms report heavy inflows of new orders and rising backlogs. Orders for electric motors are up slightly. Output in the paper and allied products and furniture industries has flagged slightly. Sales of pulp and corrugated boxes have weakened while sales of other paper products remain strong. Furniture dealers appear to have reduced their orders, which is contrary to the increases normally posted this time of year.
Shortages of both skilled and unskilled labor continue to plague many businesses in the Eleventh District. New plants are able to attract needed workers, but existing firms complain of shortages and high labor turnover. One Dallas manufacturer even complains of a shortage of illegal aliens. Because of labor shortages wage rates appear to be rising frequently, especially at the lowest pay scales.