August 5, 1986
Overview
The Eleventh District economy is still in a slump, but the rate of
decline is decelerating. Drilling activity, which has been falling
rapidly since early 1985, has stopped declining. The protracted
slide in contract construction values has moderated. Manufacturing
output is still falling. Auto and retail sales are weak. Assets of
large banks are below a year earlier and loan demand is ebbing.
Agricultural prices remain below a year ago.
Manufacturing
District manufacturers are generally reporting poor business
conditions as a result of weakened demand from the energy and
construction sectors. Primary metal and nonelectrical machinery
producers are particularly affected by declines in orders from firms
in the energy sector. Although falling oil prices have reduced input
costs to District chemical manufacturers, some note that sales are
off because of reductions in demand from energy firms. Among
producers of stone, clay, and glass, lumber and wood, and fabricated
metals, brisker construction activity outside the District has
partially offset reduced orders from builders within the District.
Electrical machinery firms report low sales growth and slumping
prices resulting from weakness in manufacturing demand. Stiff
foreign competition is holding down prices in the apparel industry.
Orders for paper and allied products are failing.
Drilling
The drilling rig count in the District states stabilized in July,
but it is almost 70-percent below a year earlier. Reductions in both
drilling permits and the seismic crew count continued, suggesting
that future declines in the rig count are likely.
Construction
The value of construction contracts has begun to stabilize, after a
fairly steady decline that commenced in the third quarter of last
year. Nevertheless, residential, nonresidential, and non-building
construction contract values remain well below a year earlier, with
particularly large year-to-year declines in office building
construction. Office vacancy rates in all major District cities have
risen significantly in the last few months, owing to a combination
of slow absorption rates and a large increase in the supply of
office space. Respondents report concern over the financial health
of office projects not only because of high vacancy rates, but
because of an increasing rate of bankruptcies among District
tenants. Despite stable residential contract values, the number of
residential building permits has fallen. Single-family home permits
have continued to edge down, while multifamily building permit
activity is plummeting.
Auto Sales
Dealers say that auto sales are declining, in part, because of
overall economic sluggishness in the District. They also note that
high sales volumes in recent years have drastically lessened the
average age of the existing automobile fleet, so that the need to
replace older vehicles is reduced.
Retail Sales
Retail sales are below last year's level. Declines are broad-based
across product lines. Particularly significant weakness was reported
by respondents in the energy-dependent portions of the District. The
depreciation of the dollar against some currencies has resulted in
increases in the prices of consumer electronics products.
Banks
At the District's large banks, loan volume is below a year earlier.
While business and other loans have declined absolutely, real estate
loan volume continues to expand, although at a markedly decreased
rate. According to respondents, the growth in real estate loans is
chiefly from take-downs on outstanding commitments on projects
already under construction and out-of-state projects developed by
locally-based borrowers. Bankers say they have tightened
restrictions on loans for land purchases and construction. Total
deposits have declined significantly since a year ago. The sharpest
drop has been in large time deposits, but demand deposits also have
contracted. Total liabilities declined in June from a year earlier,
despite a large increase in borrowings. Texas savings and loans
continue to increase their deposits, but year-to-year growth has
slowed considerably, particularly in large time deposits.
Agriculture
District crop and livestock prices are down significantly from a
year earlier and the perception is widespread that income prospects
for farmers and ranchers are unlikely to improve this year.
Increased payments from government programs this year are not
expected to offset the impact of lower crop prices. Agricultural
land values plunged during the second quarter. Declining oil and gas
prices have affected the debt service capability of over 20 percent
of borrowers in the agricultural loan portfolio of bankers
responding to a recent survey in the District.