Beige Book Report: Dallas
August 3, 1987
Although the District economy remains weak overall, several of its most important sectors are showing some growth. Most manufacturing industries report slow output growth, but industries tied to construction remain weak. The energy sector is expanding very mildly. Construction contracts have registered recent gains. Retail sales remain sluggish, but respondents are guardedly optimistic about the fall season. Auto sales have picked up slightly. Outflows of large time deposits continue to occur at District financial institutions.
District manufacturers report mixed business conditions, but overall manufacturing activity has picked up since the beginning of the year. Only manufacturers of durable goods tied to the construction industry note a continued decline in business conditions. Producers of steel and military durables continue to show strength, with respondents in both industries reporting continued strong sales and expressing a favorable outlook for the coming months. Respondents in the chemical industry also report strong sales but note that increasing oil prices could make it harder to compete overseas. Producers of electric and electronic equipment report steady sales growth, with some recent gains reported in computer equipment. Manufacturers of energy-related durable goods report that their industry has bottomed out, but they do not expect much increase in the next few months. Apparel producers note a mild year-over-year improvement in sales.
The District drilling rig count has continued to climb on a seasonally adjusted basis in response to higher oil prices. In June the rig count finally rose above year-earlier levels, and it subsequently surged in the first two weeks of July. Well permit applications rose strongly in June, portending additional increases in drilling.
Indicators of new construction activity in the District have shown some recent gains. After reaching a trough in the fourth quarter of 1986, the value of construction contracts increased mildly in the first quarter of 1987 and rose again in April and May. Moreover, new activity has recently been near or above year-earlier levels. Recent increases have been fueled by small improvements in the residential and nonbuilding sectors, while new nonresidential construction has been fairly stable. Single-family housing permits have strengthened, but multifamily permits remain at extremely low levels. Despite these increases in new construction activity, the lagged effects of last year's declines in contract values have resulted in continued reductions in construction employment.
Despite some reports of modest sales increases, District retailers generally say their sales are sluggish across all lines and that their inventories are somewhat higher than planned. In cases where sales growth was reported, it was linked to special promotions. Most respondents expressed guarded optimism concerning the upcoming fall season. Rising prices were cited for electronics items and were linked to the increased value of the yen. Some retailers expect apparel prices to rise this fall as a result of new import quotas.
District auto dealers report a slight upswing in sales, with volume increasing above year-earlier levels. The gain came as a surprise to dealers, and they are cautious about extrapolating this growth into future months. An upturn in domestic auto sales more than offset continued weakness in sales of foreign models. Foreign auto sales have been stifled by rising prices stemming from the higher value of the yen and the deutchmark.
Deposits at the District financial institutions have slipped in recent months and are now only slightly above year-earlier levels. Commercial bank deposits were below a year earlier in June, with declines coming in demand and large time deposits. Despite positive annual deposit growth at thrift institutions, their large time deposits are also declining. Furthermore, a significant portion of total thrift deposit growth is said to reflect the accrual of interest, rather than new inflows of cash from depositors.
District farmers face divergent income prospects for 1987. Livestock producers indicate that profits are likely to increase in the second half of the year, while great uncertainty is attached to the income outlook for cotton farmers. With the anticipated decline in beef supplies in the second and third quarters, cattle prices are expected to remain relativity high, spurring the demand for feeder cattle. Adverse late-spring weather hit most major cotton regions of the District, forcing growers to replant almost a million acres in June. Given average yields and a price of $.50 per pound, about $160 million in Texas High Plains gross cash receipts depends crucially on warm weather in September. An index of livestock prices received by Texas farmers and ranchers slipped 1 percent in June, compared with May, but was 19 percent above a year earlier. A comparable index for crop prices showed a 3-percent monthly reduction in June, and it was 4 percent below a year earlier.