Beige Book Report: Dallas
December 10, 1980
The recent rise in interest rates is beginning to take a toll on economic activity in the Eleventh District. Retailers are cutting prices to clear inventories and reduce financing costs. High interest rates also continue to depress sales of new cars and housing. Nonresidential construction is at the same high level of activity as last month, and drilling for oil and gas continues at a record level. Factory output continues to expand, but some industries show signs of weakening. Commercial loan demand is rising, while consumer credit continues to decline.
Price cutting is widespread at District department stores as merchants attempt to reduce inventories. Some retailers are paring orders for spring merchandise, as they anticipate a sales decline in the first quarter. Survey respondents report slim increases in dollar sales. Consumers are characterized as cautious, and credit card usage is down significantly. Part of the decline in use of credit cards, however, is the result of recent changes in billing procedures, as banks now charge interest from the date of posting.
New car sales continue to decline as many traditional sources of auto loans dry up. Because of state usury ceilings, banks no longer find auto loans profitable. In addition, only half of all potential customers can qualify for loans with the higher prices and interest rates. Normally, four out of five qualify. Commercial banks are refusing loans to customers without perfect credit records. They are also requiring larger down payments and shorter loan maturities.
Construction activity is mixed. Housing starts are declining, as high interest rates are discouraging both mortgage and interim construction financing. There is a slight buildup of inventories of unsold new homes. The level of nonresidential construction activity shows no change due to the large number of projects underway. While high interest rates are causing plans for some projects to be canceled, the outlook is for little slowing from current levels of activity as builders of large projects supply their own funds or receive unsecured interim construction loans from commercial banks. Furthermore, most large commercial projects in the District utilize foreign equity, typically with a lower return than is acceptable to U.S. investors.
Drilling activity is running at a record level. Shortages of rigs, drill pipe, and crews persist in most fields. A number of domestic drillers are expected to pull out of Canada in response to the Trudeau government's effort to nationalize that country's oil industry. That may help to alleviate shortages in some areas of the United States.
The growth in the dollar volume of loans at District banks is very strong. The rise in loan demand is being led by the oil and gas, transportation, and wholesale trade industries. Borrowers in good financial positions are continuing to utilize credit, since they believe they can ride out the current rise in interest rates. The weakness in bank loans is confined largely to consumer credit. Bank deposits have risen in recent weeks, but much of the increase has been in large CDs.
Mortgage loans at S&Ls are down substantially from a month ago. Deposit inflows are also slowing. Most of the funds S&Ls are attracting are in the form of large CDs. S&Ls are maintaining their liquidity levels by making fewer mortgage commitments.
Manufacturing has improved somewhat from a month ago; the outlook is for slow growth. Oil field equipment manufacturers are operating at full capacity, as are many defense contractors. Chemical production, while still weak, shows signs of further recovery. Production of building materials and aluminum is still declining. Fabricated metals producers report a slowdown in new orders in the last month, while a major electronics firm has scheduled layoffs in its consumer products division.
Agricultural conditions are little changed from a month ago. Winter plantings, as well as late harvests, are on schedule. Farmers are increasingly turning to Government agencies, rather than commercial banks, for loans in order to take advantage of lower interest rates.