January 31, 1979
The District economy is expected to continue to grow moderately, at least through midyear, according to the Directors and businessmen interviewed this month. Both department stores and auto dealers report strong sales although severe weather hampered sales in early January. Liquidity positions of banks and savings and loan associations are tightening. Home sales are expected to decline sharply after midyear once current mortgage commitments are taken down. Some slowing of nondurable goods production is noted, but manufacturing activity generally continues to make moderate gains.
Severe winter weather temporarily played havoc with department store sales in early January, but sales volumes have since recovered. Anticipations of continued high inflation are spurring sales of such items as jewelry, furniture, and appliances. Store executives are cautious in their sales forecasts and are maintaining a close watch on inventories. In-store inventories are near desired levels, but some large department stores remain concerned that the volume of goods on order may be excessive. Some deliveries are unusually fast, possibly indicating an excess of goods in the distribution channels.
Automobile sales, despite bad weather, are running slightly ahead of the strong pace a year ago. Recent price increases are having only a moderate effect on new car sales, and popular selling models remain in short supply.
Liquidity positions have tightened at many banks with a slowdown in deposit growth. Although most banks report no unusual difficulty in meeting loan demand at this time, they are more selective in granting loan applications. Commercial lending remains active, while real estate and consumer lending is slowing from the rapid pace of a few months ago. Most banks report depositors are shifting funds from demand accounts to time deposits, especially money market certificates, and overall deposit growth is moderating. Large- denominated CD's remain a major source of deposit growth.
Our January 1 survey of agricultural credit conditions indicates that funds for agricultural loans are adequate at most country banks in the District. Credit conditions appear tightest in southeastern New Mexico and the High Plains of Texas where a late cotton harvest and delayed crop sales have slowed deposit inflows. Some banks in those areas are particularly tight because seasonal demands for loans are on the rise. Rural bankers also report that the number of referrals to nonbank credit agencies is rising. Most correspondent banks in Texas are not willing to accommodate country banks' requests for participations in loans to farmers at interest rates below the state's 10-percent usury ceiling. Because corporations in Texas may be charged higher rates than individuals, a few farmers have incorporated in order to obtain funds.
Terms on mortgage loans continue to be tightened by S&Ls as mortgage rates have reached the usury ceiling in Texas. Some S&Ls have recently stopped making conventional mortgages. Bills to raise the usury ceiling have been introduced in the Texas legislature, but no action is expected until the last half of the year. Government insured or guaranteed loans remain relatively abundant. Contributing to the tight mortgage situation is an apparent reversal of the savings gains of the last half of 1978. A few S&Ls report being in the red, while nearly all report little new money coming in. Most money market certificates are being rolled over automatically.
Home builders still have plenty of mortgage commitments from S&Ls, and new home sales are not expected to fall off significantly during the first half of the year. New housing starts, however, are slowing as builders anticipate a drying up of new mortgage commitments for the second half of the year. Builders have already begun to work down inventories of unsold homes. New orders for lumber, concrete, and other building materials are reported to be softening at the current high level of demand, according to brokers and dealers.
Tight credit may also slow commercial building late this year. For now, however, office building construction in major cities continues very active, and office space remains tight. Construction of new hotels is booming in several District cities.
Manufacturing production continues at a brisk pace although gains in many industries are coming more slowly. Output of apparel, textiles, paper and allied products, and chemicals has tapered off in recent months. No new materials shortages have developed, but skilled and unskilled labor remains in tight supply.