Beige Book Report: Dallas
December 1, 1986
The Eleventh District economy is flat. Manufacturing is showing slight evidence of strengthening. Drilling has been stable for several months. Construction is substantially below a year earlier, but it appears to be leveling off. Auto sales have weakened lately, chiefly owing to the end of concessionary financing. Retail sales are slipping compared to last year's level. The balance sheets of the District financial institutions reflect the weakness of the District economy. Lower feed prices and higher meat prices have increased the profitability of District ranchers.
District manufacturers continue to report that orders have stabilized at low levels. Some respondents note slight increases stemming from strengthening in the national economy. For makers of primary metals, fabricated metals, and nonelectrical machinery, sales increases outside the District have helped to compensate for flat to declining sales in the region. Orders of electrical machinery are stable. Among apparel manufacturers, sales are unchanged overall and product prices are firm. Demand for stone, clay, and glass products, and for lumber and wood products, is weak because of reduced orders from the construction sector. Chemical and paper products sales are increasing slightly. Transportation equipment manufacturers say the pace of their orders is little changed. Refinery production has ebbed slightly as inventories of many products have been built up to high levels. A significant number of manufacturers link the falling value of the dollar to increases in prices of their inputs and to small upturns in their orders.
Drilling activity has varied little during the period from June through October. The number of well permits issued in the District states has been fairly steady since June. Respondents expect some upward movement in oil prices, but they believe that the increases will not lead to a significant upturn in drilling activity.
Construction continues to show signs of stability, but the potential for further downturns is evident. In Texas, the total value of construction contracts for the third quarter was slightly above the second quarter's total, but it was down 25 percent from a year earlier. As with total construction, nonresidential contracts have been steady in recent months at roughly 30 percent below last year's level. The downturn has been concentrated in office and retail construction, leaving other categories of nonresidential building only slightly lower than a year earlier. The market for office space is still weakening. In Houston, bankruptcies and consolidations have led to reductions in the amount of office space that is occupied. The office absorption rate in Dallas has dropped by half since last year. Residential construction is falling slightly. The value of residential contracts was slightly less in the third quarter than in the second quarter. Permits continue to drop, led by precipitous declines in multifamily building. Nonbuilding construction is steady.
Dealers attribute a recent sharp drop in automobile sales to the end of concessionary financing programs. As a result of sluggishness in the District economy, sales have also fallen significantly from a year earlier. Inventories are not excessive, as dealers have held their orders to modest levels. Respondents report that the full advantage of the appreciating yen has been reduced by increases in the price of domestic models and by increased imports of non- Japanese autos.
Retail sales continue to falter. The largest declines have been in the energy-intensive regions of the District. Prices of imported electronics have risen significantly. Apparel prices remain stable, but respondents expect increases as a result of new import restrictions. Retailers are keeping their inventories quite low in anticipation of continued economic sluggishness.
Total assets at large District banks are still declining, principally as a result of reductions in business loans. Real estate lending continues to expand, but at a decreasing rate. Consumer loans show slight growth on a year-over-year basis. Holdings of securities have increased steadily throughout the year. Total deposits at large District banks have fallen dramatically since the first quarter, led by reductions in large time deposits. Borrowings have increased, but not enough to completely offset the reductions in time deposits. A decline in deposits at commercial banks has been more than offset by growth at thrifts, so that deposits at all financial institutions are up from a year earlier. The pace of expansion has slowed, however.
In District agriculture, crop prices are markedly down from a year earlier while livestock prices are up. Since last July, cattle prices have increased 5 percent while feed prices have fallen 25 percent. As a result, profit margins for ranchers have widened. An early freeze has reduced the value of District cotton production, through quantity and quality losses, by an estimated $100 million.