May 6, 1986
The decline in the price of oil has brought economic expansion in the Eleventh District to a standstill. The drilling rig count continues to plunge and there is no sign that the bottom has yet been reached. Contract values for both residential and nonresidential construction are down. Falling demand from the energy and construction sectors has led to reduced sales by manufacturers. Retail sales are soft, especially in the energy-dependent areas of the District. Auto sales have begun to slow from the rapid pace of the previous two years. The recent flat loan demand at the District's large banks reflects the sluggish economy. In agriculture, credit problems are becoming more serious.
Manufacturing
Sales in manufacturing have been depressed by problems in
construction and in the energy industry. Glass producers note a
decline in orders that is tied to the downturn in nonresidential
construction, but the output of lumber and wood products is stable
as a result of strength in orders from outside the District. Primary
and fabricated metals producers are adjusting to a drop in orders
from the construction and energy sectors, but respondents indicate
that past efforts to diversify their product lines should shelter
them from serious weakness. Sales of oilfield machinery are sliding
because of weakening drilling activity. District refiners have
recently decreased production, but that is a response to a seasonal
downturn in demand. Refiners expect sales this year to be high owing
to reduced product prices. On the more positive side, electronics
firms report that their sales have stabilized and are expected to
rise, and aircraft employment and output is up sharply. Among
apparel producers, one major manufacturer has just announced large
layoffs, but past modernization and marketing efforts are beginning
to help other firms against foreign competition.
Energy
The extraction portion of the energy industry continues to slide
with little chance of stabilizing in the near future. The Texas rig
count has fallen to 50 percent of year-earlier levels, compared to a
30-percent decline during the latter half of 1985. Well permit
applications, a leading indicator of drilling activity, are 50
percent below a year earlier in District states. Another leading
indicator, the seismic crew count, has dropped 30 percent from last
year's level.
Construction
Reductions in the values of both nonresidential and residential
construction contracts are widespread. Absorption rates for office
space have fallen. Vacancy rates in most major cities are high and
may increase further as office space that is now under construction
is completed. Residential construction had been steady, but the
value of contracts plummeted in March, paced by a large drop in
multifamily units.
Retail Sales
Retail sales mirror the slowdown in other portions of the District
economy. The nominal level of retail sales in energy-dependent areas
has declined significantly. Elsewhere, slight gains have occurred.
All product lines are moving slowly, especially consumer durables.
Respondents report acceptable inventory levels, but they indicate
that continued sluggish sales may lead to undesired inventory
accumulation.
Auto Purchases
Auto purchases have ebbed in response to weakness in the District
economy and to what dealers say is buyer satiation in the wake of
the special promotions of 1984 and 1985, Sales declines, compared
with a year earlier, are widespread throughout the District. Dealers
note that involuntary inventory accumulation has begun to occur.
Large Banks
Asset growth at the District's large banks varies widely among
individual institutions, but overall increases are down sharply from
growth rates last year. Growth in real estate loans has slipped and
business lows have been declining absolutely from year-earlier
levels. The level of deposits at large banks is little changed from
a year ago. Continued weakness in energy and construction recently
induced the large District banks to increase their provisions to
loan loss reserves. At thrift institutions, deposit growth remains
strong.
Farmers and Ranchers
Income prospects for District farmers and ranchers are mixed. The
impact of low crop prices is likely to be offset by more generous
government programs and reduced grain costs will offset lower beef
prices. Generally, District agricultural prices were lower in March
than in February and they are likely to remain significantly below
year-earlier levels. District agricultural land values continued to
fall modestly in the first quarter. Agricultural bankers report that
the proportion of agricultural loans with repayment problems is up
from a year ago. Nearly 10 percent of last year's farm borrowers
will not receive operating loans this year, compared with a
reduction of 7 percent in 1985. Although the falling price of energy
has lowered operating expenses for District farmers, declines in
income from oil and gas royalties are likely to more than offset
these cost reductions.