Beige Book Report: Dallas
August 6, 1985
Economic growth in the Eleventh District remains slow, although signs of strengthening are discernible. Overall manufacturing activity is flat, although some sectors have benefited from increased demand. The fall of energy prices continues to depress drilling activity and energy-related manufacturing. Growth in retail sales has been modest in response to lower interest rates. Prices of farm products generally remain below year-earlier levels.
Eleventh District manufacturing activity has stabilized, but overall performance is flat. Some sectors show signs of rebounding, but the weak energy sector continues to hinder sales in many industries. Primary metals and nonelectrical machinery manufacturers report increased sales to food processors and defense contractors, but this rise barely offsets lower demand from firms catering to energy. Excess inventories of construction-related goods, in addition to weak energy demand, are hindering production of fabricated metal products. Manufacturers of stone, clay and glass and of lumber and wood products note that competition from foreign producers has reduced their sales to the construction sector. A rise in home- improvement sales is offsetting reduced sales to contract construction firms for the latter group. Apparel manufacturers report substantial increases in orders compared with last year. Electrical machinery producers note modestly higher sales, although semiconductor makers attribute continued weak demand to excess inventories held by buyers.
Eleventh District drilling activity remains depressed, but the rate of decline appears to be slowing. Despite expectations of a continued slide in oil prices, the year-over-year rate of reduction in the number of active drilling rigs in Texas eased in June. Alter seasonal adjustment, the rig count increased from June to July. Recent changes in proposals concerning drilling-related tax provisions may have contributed to the rise. The number of well permit applications in Texas and the U.S. seismic crew count, which are leading indicators of drilling, remain below year-earlier levels.
Retail sales continue to grow weakly, particularly for consumer durable goods. Although overall sales taxes been sluggish, respondents indicate that total inventories are not excessive. Apparel purchases have shown noticeable strength. Promotional markdowns are keeping retail prices near year-earlier levels. Employment levels are unchanged but respondents are still concerned that continued weak sales may force some layoffs.
Strong growth in auto sales continued throughout the second quarter with several respondents reporting increases over last year's exceptionally strong pace. Manufacturers' interest rate discounts and other promotions have stimulated sales, while prices have remained flat. Dealers report that inventories of imports and some large domestic models are fairly low, but small domestic models are in good supply. Some respondents, noting a slowdown in recent weeks, expressed concern that sales may level off in the next few months.
The value of nonresidential construction contracts continues to rise, but the year-over-year increase in May was the lowest in the last twelve months. Analysts have noted recently that Dallas now leads the nation in vacant office space. Although Houston s vacancy rate is falling, vacancies in some other Texas cities are rising. Rent discounts and other leasing inducements are being used throughout the District.
The value of residential construction contracts has been rising in the District since the beginning of 1985, as has the number of building permits issued. The levels relative to one year earlier remain low, however. Recent declines in mortgage interest rates have helped stimulate single family building, while the absorption of excess units has revived building of multifamily dwellings somewhat.
Asset growth at District large banks remained modest in June. Declines in business loans were offset by increases in real estate lending and holdings of government securities. Loan growth at Texas savings and loans remains high, although the rate of gain has ebbed somewhat in recent months. Deposit expansion at large banks continues to decelerate because of slower increases in large time deposits. New issues of jumbo CD's account for most of the deposit growth at savings and loans. Eleventh District agriculture continues to face flat or declining prices, but the slide in land values abated during the second quarter. In a normal seasonal downturn, Texas feed grain prices fell in June from May, while livestock prices held steady. Prices of most Texas crop and livestock items have been below last years levels for seven consecutive months. Meat production in the state is also lower than year-earlier levels.