March 14, 1979
Moderate economic gains are noted by Directors and businessmen in the Eleventh District. Retail sales improved with the weather, and several manufacturing industries continue to post strong gains. Drilling activity, however, continues its seasonal decline. There is little change in bank lending or deposit growth. Residential construction is expected to fall off sharply after midyear although home sales have held up well so far.
Warmer weather in recent weeks has helped boost sales at District department stores. Consumer spending is running ahead of expectations, according to retail executives. Much of the strength is in soft goods, as sales of hard goods have weakened. Inventories at most stores are near desired levels, but a few stores continue to trim stocks with price markdowns and sales promotions.
Auto sales also got a lift from improved weather. Most dealers report sales volumes are running at least as high as a year ago. Both domestic and foreign car dealers are sharing in the gains. Economy cars are once again in strong demand with renewed concern over the availability of gasoline supplies and higher fuel prices. Inventories of domestic cars are generally heavy.
The growth of manufacturing output is slowing, but some industries continue to make strong gains. Two major aluminum producers in the District recently announced plans to reopen previously idle pot lines and smelters because of improved demand and higher product prices. New orders for metal buildings and metal castings also appear to have increased recently following a period of slack. Metal fabricators say that the recent sharp rise in scrap metal prices may make it difficult to meet the President's guidelines on finished goods prices.
Most of the current decline in the number of active drilling rigs in the past month is seasonal. Drillers remain concerned, however, about the restrictions placed upon natural gas pricing by the Natural Gas Policy Act. Drillers cite penalties for noncompliance, the ambiguity of some of its provisions, and the lack of profit incentive to produce as factors contributing to the decline in the rig count.
Concern over a possible gasoline shortage has sparked large increases in the wholesale prices for gasoline. Spot market prices of regular gasoline on the Gulf Coast, for example, have risen 7.5 cents since January to 62 cents a gallon.
Bank lending remains little changed from January's strong level. Some lessening of loan volume to correspondent banks and to energy- related borrowers is noted. Loan demand is expected to soften in coming months with defaults increasing slowly. Liquidity remains adequate, and deposit growth is flat.
Savings and loan associations report improved savings inflows in recent weeks. Money market certificates account for nearly 75 percent of all new savings and make up 25 percent of total savings capital at some large associations. S&Ls are placing much of this money into short-term investments or construction loans. Local S&L officials were quoted to the effect that the recent revision in Regulation Q ceilings will reduce the supply of mortgage credit.
Higher interest rates and usury ceilings have reduced the available supply of mortgage credit in Texas, Louisiana, and New Mexico. Exemptions from the laws in Louisiana and New Mexico have eased the situations in those states somewhat. Lenders in Louisiana are allowed to charge points to the borrower, raising the effective rate above the 10-percent usury ceiling. Mortgages which are eligible for resale in the FNMA and FHLMC markets are exempt from New Mexico's 10-percent usury ceiling, helping to keep conventional mortgage lending going in that state. The New Mexico Housing Authority is also supporting the mortgage market through the sale of its bonds.
Mortgage commitments made last year and not yet taken down are providing for much of the credit needs of home buyers now, and home sales continue strong. Builders, however, are having difficulty securing mortgage commitments for later this year and are beginning to reduce their labor forces through attrition in anticipation of a slowdown in home sales.