January 28, 1986
The Eleventh District economy remains sluggish. Manufacturers report little overall change in activity. The weakening of oil prices has led to significant declines in the drilling rig count. The value of construction contracts has begun to fall significantly. Retail sales are growing, albeit at a slow rate. Automobile sales are weak compared to the fall, but a new round of dealer incentives is expected to increase sales. Asset expansion remains quite slow at the large banks. District farmers and ranchers continue to face weak prices for crops and livestock.
Manufacturers' sales remain flat in the District, with gains in some sectors offset by lower demand in others. The weak energy industry and slowing construction remain the prime sources of declining orders. Stone, clay and glass producers note increasing glass demand from the transportation sector, but they report that sales to the construction sector are slipping. Demand for lumber and wood products is declining as a result of reductions in home building. Decreased import competition and the lagged effects of past increases in construction contracts have led to recent increases in sales of primary metals, according to manufacturers. Fabricated metal producers' sales to the energy and construction industries are ebbing. Demand for nonelectrical machinery, both from other manufacturing industries and from energy-extraction firms, is sluggish. Respondents at electrical equipment firms say orders for their products are increasing due to rising non-energy demand and because their customers have run down excess inventories of semiconductors. Sales are unchanged for chemical and allied products manufacturers. Buoyed by strong winter demand, both output and profit margins at District refineries are said to be high.
The outlook for oil prices has forced the drilling rig count to its lowest level since 1976. The decline has been steeper in Texas than in the rest of the nation. Well permits, a leading indicator of drilling activity, edged up in Texas in November, but permits dropped in Louisiana. The seismic crew count, another indicator of future drilling, continues to fall.
The value of construction contracts has fallen for three straight months in the District states. The decline is steepest for nonresidential building, although residential has also fallen significantly. The levels for both categories stand substantially below those of a year earlier. The reduction in nonresidential contract values can be seen in most categories of building, but particularly in office construction. Recent declines in residential construction are part of an ongoing trend. Single-family housing permits were 20 percent below the 1984 level, which was 30 percent below that of 1983. Nonbuilding construction continues at a strong level.
Respondents report that retail sales growth in December was slightly stronger than expected. Profits were higher than a year earlier, as discounting was less common than in the previous Christmas season. Sales of women's apparel and other soft goods have risen faster than those of big ticket items, such as home appliances, electronics, and furniture. Retailers are keeping inventories low in expectation of slow sales growth in the near term.
Automobile sales have recently weakened. Dealers link the current slowdown to last fall's unseasonally large increase in sales, which occurred in response to manufacturers' special interest rate incentive programs. The decline is also attributed to buyer anticipations of a new round of incentive programs. The recent ebb in sales has led to excess inventories of some domestic autos, but import dealers complain of shortages.
Despite an increase in growth over the November rate, total loans at the District's large banks rose in December at a pace substantially below the monthly average for the year. Business loan growth increased slightly in December, but the average level of business loans for the fourth quarter was below its year-earlier level. The value of consumer loans in December remained below a year earlier, as it did in all months of the fourth quarter of 1985. Real estate loan growth declined in December, as it had throughout the year. The rate of deposit growth at large banks also declined in December, continuing a pattern that began in March. Deposit growth has also slowed at all District financial institutions.
District agricultural crop prices in December were essentially unchanged from a year earlier, while livestock prices were 6.5 percent below their of December 1984. Foreign demand for cotton continues to fall, with the current season's exports now projected to be less than half those of a year earlier. Despite reduced supplies, lackluster demand kept District livestock prices, which normally turn up at this time of the year, slightly lower in December than November.