Beige Book Report: Dallas
September 9, 1980
The pace of economic activity in the Eleventh District has quickened, but further increases in interest rates would be expected to reverse the current recovery In the housing sector. Back-to-school purchases have bolstered department store sales, and new car sales are slightly improved. The number of office buildings to be constructed is rising sharply. Factory output is mixed, while drilling activity has reached a 25-year high. Loan demands are strengthening a bit at District banks and S&Ls, but these institutions are finding it difficult to attract deposits. Drought conditions have cut deeply into crop production and are retarding the current expansion phase of the cattle cycle.
A pickup in back-to-school sales has improved somewhat the sales outlook at District department stores. However, dollar sales volumes are only slightly above a year ago, despite price cutting and heavier than normal promotions by some stores. Consumers continue to buy selectively, and the low level of credit card usage suggests consumer buying patterns were sharply altered by the special credit constraint program. The prolonged heat wave also continues to discourage some shopping. All respondents indicate retail inventories are under control.
Auto sales show only slight improvement, but most dealers are optimistic about future sales after the new models are introduced. Many dealers attribute increased sales to an easing in credit availability. The pattern of new car sales, however, remains unchanged with foreign and small domestic models outselling large domestic models. "Good" used cars are selling well and are in tight supply. Chrysler dealers report heavy inventories of new cars, while other dealers expect most stocks will thin out before the 1981 models are introduced if current sales hold up.
Further increases in interest rates threaten to stifle the recovery in residential construction. Conventional mortgage rates for single- family homes rose about 1 3/4 percentage points in August. The rise triggered a scramble by buyers for available credit before interest rates rose even higher. Interest rates of 16 to 17 percent are helping put a damper on Interim construction loans for multifamily dwellings. Demand is high for apartments in the Dallas-Fort Worth area where the occupancy rate is about 94 percent, but Houston is somewhat overbuilt with an occupancy rate of about 85 percent.
Construction of office buildings is in full swing across the District. Activity is well ahead of a year ago, and the number of large projects is up sharply. It was recently announced two 50-story buildings will break ground in Dallas before next summer, and a 35-story office will be constructed in Fort Worth. Three new projects in Houston valued at $100- $150 million each are currently being negotiated. Canadian firms are constructing a number of these buildings, and the equity in nearly all of them is reported to flow from foreign sources.
Manufacturing activity is mixed. Output in construction-related industries is recovering slowly in response to the recent rise in housing starts but will falter if high interest rates again throttle down the number of housing starts. Lower demand and excessive inventories continue to weigh down production in the refining and chemical industries. Aluminum production in Texas is down sharply as a result of weak demand and rising energy costs. The nationwide copper workers strike has disrupted copper and zinc production in the District. A major men's apparel firm reports new orders have risen sharply in the past six weeks, and output may reach a record level for the current quarter. Drilling is at a 25-year high, and demand for oil field equipment remains strong. Because delivery schedules for new rigs have stretched to more than a year, many drillers are building rigs from available new and used components.
Total loans at commercial banks are rising slowly. Energy and construction-related loans continue to be the areas of greatest strength. Home improvement loans are also strong, while commercial loans are increasing. Auto loans are weak in part because interest rates quoted by nonbank sources of credit are often lower than bank rates. Deposit inflows at commercial banks are sluggish as declines in demand deposits are offsetting Increases in time deposits.
District S&Ls report further deterioration in net savings inflows. S&Ls have been competitive in issuing jumbo CDs, while passbook savings are on the decline. One institution reported that passbook savings are being used for back-to-school purchases. The underlying demand for mortgages is strong, but many potential home buyers were squeezed out of the housing market in August.
The drought affecting most of the District continues unabated. Only the lower Rio Grande Valley and South Texas Plains received beneficial rainfall from Hurricane Allen. Damage from high winds and flooding totaled $80 million and was confined to a seven-county area along the coast. Showers revived rangelands but did little to boost crop yields. Damage to most crops is irreversible. Cotton production, the District's leading crop, is expected to be 25-30 percent below a year ago.