Beige Book Report: Kansas City
January 14, 1976
Judging from the responses of bankers and of manufacturers' purchasing agents, little has developed of late in the economy that gives cause for either excitement or concern. Bankers once again report flat loan demand except for seasonal increases. Over the first quarter, they expect real estate loans to weaken, consumer loans to improve moderately, and business loans to change little. They see continued strong consumer saving and moderate business saving. For some responding bankers, this all adds up to further declines in interest rates, although others foresee small increases in the coming months. The word on materials inventories from purchasing managers is "low". Buyers for major manufacturers expect to be able to find materials easily this year at prices pretty near where they are now. With a heavier collective bargaining calendar ahead, the usual preliminaries to negotiations have picked up, but little talk of strikes is heard. In the agricultural sector, the cattle feeding and hog industries are expanding, so that supplies of beef and pork are likely to rise.
Purchasing managers plan to hold down inventories of all materials in the year ahead, reflecting their expectations of plentiful supplies and only modest price increases in 1976. Without exception, buyers are sticking to very tight inventory control policies. A sample of responses: "We are keeping our inventories as low as we possibly can" (luggage, folding furniture); our inventories are very tight although we expect a great year" (audio and visual tape equipment); and "we dropped our materials inventories way down last year and we will keep them there" (greeting cards). Purchasing agents expect price increases to average between 5 and 6 percent. They see the future trend of petrochemical prices as the big question mark. The prices of textiles, especially cotton, will rise at double-digit rates, say the agents, and plastics will show sizable gains. But only minor increases are expected in papers and metals. Said one purchasing manager, "Aluminum has just gone up 5 percent, but they may not be able to make that stick". The buyers see no crunches developing in materials, citing "excess capacity" and "soft markets" in most supplies.
The local bargaining calendar, as well as the national, is heavier this year. The contract of a local carpenters' union expires April 1. About 6,000 carpenters in two states are affected. The union spokesmen already have begun jockeying for bargaining position, with statements like "we are now behind with the crafts". Contracts with utility workers are due to be renegotiated later this year, with higher rates a foregone conclusion. The upcoming auto negotiations will affect 10,000 workers at three major plants in the Kansas City area.
Recent reports continue to provide evidence of a strong expansion in the cattle-feeding industry. As of December 1, the seven major feeding states had 25 percent more cattle on feed than a year ago, due largely to a 47 percent increase in November placements. Furthermore, the hog industry apparently has entered the expansion phase. Hog producers recently reported that they plan to increase December-May farrowings by 8 percent above year-ago levels, the first such increase for this six-month period since 1971. These developments signal a return to larger red meat supplies during the second half of 1976, although a likely reduction in nonfeed cattle marketings will temper the increase in beef output. Livestock prices are presently relatively low and may stay that way, but the significant drop in feed costs during the past year should permit producers to expand red meat output at a profit.
Tenth District bankers report little change in loan demand in December. Business loan demand increased seasonally with gains in loans to retailers, agribusinesses, and others. Few bankers expect any marked improvement in business loans in the first quarter of 1976. Consumer loan growth in December was also about seasonal, but signs of a pickup are appearing in loans for autos and other consumer durables. Moderate improvement in consumer loans is expected in the first quarter. Further weakness in real estate loans, however, is anticipated as existing projects near completion.
Bankers expect either further declines or only small increases in market interest rates in coming months. Because of this and their belief that consumer spending will rise only moderately, most expect continued strong inflows of consumer savings. Moderate inflows of business savings are also anticipated. Reflecting these expectations, the bankers contacted are not attempting to lengthen further their CD maturity structures at this time.