Beige Book Report: Kansas City
September 9, 1970
Business and economic conditions remain reasonably firm across most of the Tenth District. Reporters generally stress the volume of construction in several of the large cities and the steady trend in total employment. In general, agriculture is experiencing a fairly good year, although there are a number of areas with moisture deficiency. The exceptions to this generally favorable appraisal of the District's economy continue to be Wichita, where aircraft production is down substantially, and Kansas City, which has been plagued by a long construction strike.
In Kansas City, that strike appears to have reached an end with the agreement this week to a four-year contract by one of the striking unions and the builders association. Negotiations with four other unions continue, and the outlook for settlement is hopeful. The agreement with the common laborers union is strongly inflationary, involving an overall increase of $4.15 per hour over a four-year period. Thus, laborers who have been receiving $4.02 per hour will receive $8.16 per hour by 1973, The first year increase is $1.00 per hour.
Settlement of the strike in Kansas City will bring a renewal of construction and a new tempo in the local economy. A major strike in the auto industry, however, would prolong depressed conditions in Kansas City. For the longer run, the impact of the inflationary construction settlement is uncertain at this time, but is probably adverse to new construction.
Loan demand at District banks has eased somewhat, but continues strong. However, there is scattered evidence that demand is turning weak in some places. For example, a large Denver bank reports it has had requests from other banks to purchase loans, including requests for $1 million purchases. Not much change in loan demand is expected during the fall if interest rates stay at current levels. There are indications, however, that some customers are waiting for lower rates and that a reduction in the prime rate could result in an increase in loan demand.
Deposit experience in different cities has been mixed depending upon the activity of larger banks in seeking CD's. The suspension of ceilings on CD's of under 90 days maturity has enabled several of the larger banks to attract substantial amounts of funds. Some other banks report that their CD growth would be more significant if the minimum size for large CD's were reduced to $50,000.
Despite the growth of CD's, bank-related issues of commercial paper have remained substantially unchanged. The extension of reserve requirements to commercial paper will not produce initially a significant reduction in the amount outstanding. A couple of banks were vigorous in their protests of the application of reserve requirements to outstanding commercial paper issues, since the interest costs on such paper are fixed and the reserve requirements effectively increase the cost. Most of the banks will continue to issue some commercial paper because of its advantages over large CD's, such as smaller size possibilities, longer maturities without interest ceilings, and the ability to terminate a contract.
The combined effect of the extension of reserve requirements to commercial paper and the 1 percent reduction in requirements against time deposits over $5 million will vary greatly among cities. Banks in a couple of cities will experience significant increases in required reserves, while reductions elsewhere will be relatively small.
There is a general consensus that the prime rate will be reduced in the next few weeks. For the most part, bankers do not believe that a reduction is justified at this time in view of the continued strong loan demand and the high cost of obtaining funds. Because of these considerations, several bankers indicated that a prime rate reduction may not be extended to as many borrowers as in the past.