Beige Book Report: Kansas City
June 16, 1976
Tenth District businesses reported no indication of impending shortages and stressed their intention to avoid an overbuying spree like that which preceded the recent recession. Similar positive results were obtained in a survey of major agribusiness firms. These optimistic findings contrast markedly with results reported in a national survey of purchasing managers. On the financial front, business loan demand has increased slightly and some banks have reported that they have begun to rebuild their CD levels.
Contrary to the results reported in a recent national survey of purchasing managers, Tenth District purchasing managers, executives, and business economists do not anticipate the approach of capacity constraint problems, shortages, or major price increases. The only potential problem areas mentioned were those of iron castings and uranium. On the other hand, several important observations were repeated by a number of respondents. For example, an economist for a major building materials manufacturer expressed serious doubts as to the development of capacity shortages in the national economy. Noting that while some industries were tighter than others, this was due both to cyclical factors and to customers being encouraged to buy (or even to overbuy) in the first quarter by promotions, price breaks, or announced price increases. In his view, these promotions explain the first quarter GNP inventory changes. In the unlikely event that second quarter inventory changes are also strong, he would consider this grounds for concern. Similarly, an energy economist pictured an oscillating inventory picture, with overliquidation in 1975 yielding strong compensating first quarter data, a situation unlikely to be repeated.
The major consensus, however, held by a broad range of purchasers and producers of aluminum, steel, paper, wood, textiles, plastics, and various petroleum products was that overbuying was not anticipated and that they themselves would not participate in it. One packaging executive expressed a "quiet optimism that things are moving along with strength and stability." A major paper purchaser noted "much resistance to stockpiling" because of the recent experience and saw no evidence of any attempt to hedge against future shortages. A large plastics and textile purchaser was firm in stating "We're not overbuying, we're playing it lean." Similarly, a major steel user stressed that "Nobody is really going out to buy just anything they can get as was the case a few years ago. Instead, he felt that everybody was trying "to run as lean as possible." In line with these beliefs, it was generally felt that price increases would fall in the 5- to 8-percent range in 1976.
The one area where near term concern was expressed was in iron and steel castings. If the economy continues to pick up, the possibility of a severe castings shortage by mid-1977 was noted. Currently, customers of foundries serving automobile manufacturers are on allocation. The major reason for this impending problem, stressed the respondent, was the tremendous impact on foundry costs introduced by EPA and OSHA regulations. According to this source, this factor has led to 20-30 small foundry closings a year and to a significant cancellation of new facilities by existing foundries. Also because of EPA, a paper products manufacturer indicated there is a possibility of tightness in the supply of paper in 1-2 years. Likewise, many other manufacturers complained about EPA and OSHA regulations and costs.
A longer-term problem was said to exist in uranium production, where the low price in the early 1970's discouraged exploration and, though the price has risen significantly, the 8-year lead time points to a possible capacity crunch in the late 1970's.
Two other comments by respondents were noteworthy. Three producers, one of nylon textiles (supplied by DuPont), one of polyethylene resin (supplied by Exxon), and one of steel, suggested that artificial scarcities and rumors of shortages might have been introduced by the suppliers themselves rather than being due to excess demand. Finally, a large secondary manufacturer of aluminum from scrap stressed that, while processing capacity is ample in his industry, scrap is somewhat short. This situation is being aggravated, he contends, by export of scrap and a "ridiculous Senate bill to give tax credit for building unneeded recycling capacity which will only increase demand for and drive up the price of scrap already in short supply."
Conditions in the agribusiness complex tend to mirror these developments in the rest of the economy rather closely. The inventory situation here is being scrutinized very carefully to avoid the problems encountered two years ago. Reporting firms indicated that they are either keeping inventories at minimum levels or are instituting tight controls. However, a few firms mentioned that they have done some hedge-buying recently on steel products in anticipation of impending price increases, but the quantities involved were not excessive. For the moment, very few firms are encountering difficulties in procuring raw materials. Lead times are reported as "normal" in most cases, although there is some evidence that lead times are beginning to lengthen for steel, paper, and a few plastics. However, no one seemed to be overly concerned about input shortages in the foreseeable future. The reports on capacity utilization were mixed. Feed manufacturers did not seem to be pressing against capacity limits at all, and the same thing was generally true for agricultural chemicals. Utilization rates were typically under 70 percent. However, a few agribusiness firms were operating at "full bore" and had plans to expand capacity. Included in this group were a large farm supply cooperative, a farm equipment facility that assembles combines, and a firm manufacturing on-farm storage buildings. Virtually all agribusiness firms in the survey reported price increases for both raw materials and manufactured products, though again, generally in the 5- to 8-percent range.
Tenth District banks contacted for the June survey reported small increases in business loan demand over the last month. In most cases, demands were made by local rather than national accounts. Industries mentioned as showing increased loan demand varied—manufacturers, retailers, energy-related businesses, and agribusinesses were all mentioned. One bank said that participation in smaller banks' loans was an important factor. Real estate loans are still weak, although interest does seem to be picking up in commercial projects. Consumer installment loans have been either steady or increasing slightly, with credit card sales holding up better than auto or other consumer loans.
Negotiable certificates of deposit were run off during the month of May, reflecting the slowness of business loan demand and continued inflows in savings deposits. However, most banks reported that their CD levels had reached their low point, and several reported they were rebuilding their CD levels.