Beige Book Report: Dallas
October 23, 1986
The District economy appears to have stabilized after a prolonged decline, but weakness in the energy and construction sectors is hampering growth. After major declines earlier in the year, the drilling rig count is increasing slowly. The value of construction contracts is substantially below a year earlier and manufacturing remains sluggish overall. Retail sales continue to ebb, while automobile sales are increasing, owing to U.S. manufacturer incentive programs. Balance sheets of District banks continue to reflect the sluggishness of the regional economy. District farmers and ranchers face favorable income prospects for the year.
District manufacturers generally report that sales have stabilized at recent low levels, although some note further declines from weakened demand from the construction sector. Makers of primary metals and nonelectrical machinery products report flat to declining sales, and they expect demand from the energy and construction sectors to remain depressed. Electrical machinery producers note only slight sales growth and profits. Apparel manufacturers say that prices for their products are stable while sales are flat to slightly increasing. Orders are up slightly for transportation equipment firms, particularly those producing aircraft parts. Makers of chemical and allied, and paper and allied products report that sales are unchanged overall.
The drilling rig count has again begun to turn up, after declining in September, and it is now at its highest level since May. Even so, the taunt for early October was less than half its year-earlier level. Regarding the potential for future activity, the two most widely followed leading indicators of drilling activity are showing divergent patterns; well permits are growing strongly while the seismic crew count has lately been declining.
Retail sales remain slow while auto sales have recently picked up as a result of national promotions by U.S. auto manufacturers. Retailers say that sales have been slower than expected and some have lowered their sales projections for the remainder of the year. Sales of consumer durables are very weak but apparel sales are strong and growing. Auto sales are strong but dealers are concerned that a sharp slowdown will occur after the incentive programs are discontinued.
The average value of District construction contracts changed little between the second and third quarters of 1986, but construction contract values are about 20 percent below last year's level. Marked reductions have occurred in office and retail building, but strength in other components of nonresidential construction has recently preserved the total value of nonresidential contracts. Past overbuilding of multifamily housing units and continued weakness in the District economy has contributed to some recent slippage in residential activity. Respondents believe further declines in multifamily residential contract values are likely, but single- family construction remains fairly steady. Single-family permits are about 15 percent below last year's level, and they have shown little change on average since the beginning of the year. Respondents indicate that lower mortgage rates have made homeownership affordable to a larger segment of the population, and that appears to be providing some stability to the single-family sector.
The balance sheets of District banks continue to reflect the overall weakness in the District economy. Total loans at large banks remain below year-earlier levels, with the sharpest dropoff occurring in business loans. Real estate loans continue to rise on a year-over- year basis, but at a decreasing rate. Total deposits at large banks remain below year-earlier levels, with particularly pronounced declines in large time deposits. While deposits at a sample of all commercial banks have also decreased, their rate of decline has been lower than that of the large banks.
Prospects for income growth in 1986 for District farmers and ranchers continue to be relatively strong. Cotton and rice farmers, despite lower market prices, are receiving large payments from government programs. Cotton futures prices have rebounded from their July lows, reflecting the reduced amount of cotton coming to the market from the government's cotton program. Government programs are less generous to grain farmers, who are receiving sharply lower prices, compared with a year earlier. District cattle producers are responding to widening profit margins by putting more cattle on feed—up 26 percent in August 1986 over a year previous. The income outlook for all District livestock producers remains positive as feed costs fall.