Beige Book Report: Dallas
January 28, 1987
The Eleventh District economy has begun a modest recovery, but overall activity is still below a year earlier. The decline in manufacturing appears to be leveling off. Drilling has rebounded somewhat. Nonresidential construction remains stable, but residential construction contract values have declined. Retail sales have been weak, but auto sales were particularly strong in December. The condition of the financial institutions still reflects the overall weakness of the region's economy. Despite some increases in December, prices of District agricultural products remain below a year earlier.
Manufacturers are noting more positive signs than at any time in the last two years, although refineries have cut production slightly in anticipation of a seasonal downturn in demand. A host of manufacturers of various energy-related durable goods report that orders have either bottomed out or that slight recoveries have begun. Construction-related durable goods producers say that declines in orders are over. For primary metals manufacturers, increases in demand from the rest of the country are offsetting declining orders from District customers, so that overall orders are unchanged. The steady pace of nonresidential construction that has continued since early in the first quarter has led to stability in the fabricated metals industry. Production of high technology goods such as instruments and electronics is stable. Orders for transportation equipment, chiefly in the area of defense-related aircraft, are up.
The drilling rig count in the District states has risen 12 percent on a seasonally adjusted basis since hitting bottom in July. Nevertheless, the count for December was still less than half its year-earlier level. Leading indicators of drilling activity suggest that the rig count will continue to increase slowly in the near term. The seismic crew count reversed its prolonged decline and rose in both October and November. In Texas, well permit applications have also edged upward. Respondents say, however, that recent oil price increases will not result in large increases in drilling activity anytime soon.
Although nonresidential construction has stabilized after falling severely in the first half of 1986, residential construction continues to decline. While residential construction has been declining throughout most of 1986, the bulk of the reductions have generally occurred in multifamily construction. During the fourth quarter, however, the weakness has spread to single family building. Nonbuilding construction remains fairly steady.
Automobile dealers attribute strong sales during December to buyers rushing to make purchases while they could still take advantage of the deductibility of the sales tax under federal income tax law. Inventories are generally near their desired levels. Respondents report that Japanese manufacturers continue to partially offset the price effects of the appreciating yen by accepting lower profit margins. Dealers expect a slow first quarter because of continued weakness in the regional economy and changes in the tax laws.
Retail sales remain slow because of lackluster economic conditions in the District. Some retailers note that holiday sales were somewhat stronger than expected, but they say receipts were still below a year earlier. Big-ticket goods, such as furniture and appliances, continue to sell very poorly. Respondents report some increases in apparel prices stemming from new import restrictions. Retailers generally expect sluggish sales through the first quarter.
District bank performance continues to reflect the region's sluggish economic conditions. At large banks, total loans have fallen well below the year-earlier level, led by a significant year-to-year decline in business loans. Consumer loans are only slightly lower than a year earlier, while real estate loans are slightly up. Securities holdings have increased markedly, although at a somewhat slower rate than at large banks nationally. Securities holdings as a share of total large bank assets, however, have risen at a substantially faster rate in the District than nationally. Total deposits at the large banks remain far below year-earlier levels, while borrowings continue to surge and were 36 percent above last year's figure in December. The largest proportional deposit reduction has been in large time deposits. At all District banks, total deposits are also down from a year earlier.
Texas farmers received slightly higher prices in December, compared with a month earlier, but livestock and crop prices generally remain below a year earlier. Despite a dip in livestock prices in December, cattle producers continue to benefit from low feed costs and relatively strong demand for beef. Texas cotton production in 1986 is estimated to be down almost 34 percent from that of 1985, as a result of government acreage reductions and because bad weather reduced harvested acres, yields, and quality. Weather-related gross income losses to cotton producers will exceed S50 million. These losses will primarily affect areas of west Texas where financial stress is already relatively high.