Beige Book Report: Kansas City
October 14, 1970
There is evidence that future growth in large CD's at Tenth District banks will be less. There are indications also that business loan demand may be easing slightly. The labor situation in the Kansas City area has worsened as the construction strike—now in its seventh month—continues and the General Motors strike prevails at several large GM assembly plants. The reduction in output of feed grains and high feed-grain prices is likely to have an impact on the WPI and CPI within several months. Instead of providing a downward pressure on these indices which occurred from March to August, farm prices may again exert upward pressure later this year or early next year.
Those large District banks which have actively sought large CD's (many have not) have continued to attract substantial amounts of funds. Growth rates of outstanding CD's have been comparable to those at large banks in New York City and Chicago. One peculiarity in the Tenth District has been that a significant amount of CD funds have come from state and local governmental units—about one-third of the total growth in CD's. This source of funds would seem to be limited, so that future growth of CD's may slow.
Despite the rapid growth of CD' s, most of the District banks so far have retained bank-affiliate commercial paper as a source of funds. One large Tulsa bank, however, is actively substituting CD's for its commercial paper. Most of the CD funds have been utilized by the banks to restore liquidity. Only a limited amount of the funds have gone into loan expansion. As a result, some banks are beginning to feel much more comfortable. One larger Denver bank this week reduced its CD rates below those in New York City to slow down the inflow of funds. This bank had been aggressively seeking CD's by offering rates above those in New York and had more than doubled its outstanding CD's over the past three months.
Business loan demand in the District is showing some signs of easing. In particular, business loans have not reflected any of the growth of CD's in those cities that had been squeezed for funds. Except that some loans have been transferred from parent holding companies back to the banks, there has been no noticeable pile up in loan requests following the reduction in the prime rate.
There is little indication that the Tenth District economy is deviating significantly from national trends. There are a few signs of recovery but areas with significant problems remain. Aircraft production is low and the airline industry has substantial overcapacity because of a sharp slackening in the rate of growth. Airlines with large District installations are cooperating with other trunk carriers in an effort to get CAB approval to reduce flights on some highly competitive routes.
Construction activity is reported to be moving upward at a rapid pace in Denver and some other District cities. In Kansas City, however, long construction strikes this year and last virtually halted construction activity and are resulting in highly inflationary wage settlements which hurt future prospects. Four of the seven striking construction worker locals signed contracts with the building contractors in late August. These agreements provided for the increases of about 100 percent over four years. One of the three remaining locals on strike, the Cement Masons, has recently rejected a four-year increase of 90 percent. This is explained by the fact that many of the Cement Masons are presently being employed by the heavy construction contractors at the wage levels determined a year ago which exceed the rejected offer made by the builders. Consequently, there is no strong incentive for them to settle the strike that started on April 1.
The effects of the General Motors strike are adding to Kansas City's problems. It has added 8,000 idle workers to the 12,000 still out due to the construction strike. Kansas City led the nation last year in man days lost to strikes with 2.7 million and is leading again this year with 3.3 million lost due to the construction strike alone.
Damage to the corn crop from blight and unfavorable weather conditions apparently is severe. Consequently, grain prices are likely to retain most of the gains of the past few months and may go higher. The reduction in output of feed grains and high grain prices will discourage the rapid expansion that has been occurring in meat production. This set of conditions may have a temporarily depressing effect on livestock prices, as fewer animals are withheld for breeding and perhaps some breeding stock liquidated. However, as the rate of expansion and slaughter weights decline, livestock prices are likely to increase, perhaps sharply.
The net effect of the anticipated changes suggests a bottoming-out of the decline in the index of prices received by farmers that has been occurring since March. It is probable that the index could again start rising late this year or early next year. To the extent that this evaluation is correct, farm prices may soon start exerting upward pressure on the WPI and CPI instead of being a retarding influence such as has been the case since February.