Beige Book Report: Kansas City
August 11, 1976
Consumer spending has settled down in District department stores but not in domestic new-car dealer showrooms, where full-size luxury models are nearly sold out and where orders for new models are already strong. Chain store managers, despite their lackluster summer sales, expect good business in the months ahead, report slightly heavy inventories, and foresee fairly stable prices for their merchandise. The outlook for food prices, meanwhile, is very uncertain, given the mixture of offsetting forces affecting farm prices. Banks report some increase in agricultural loans but none in business loans. Car buying continues to give moderate growth to consumer loans. Despite the current weakness, most bankers expect the prime rate to rise but not by much.
Reports vary, but the rate of growth of retail sales by District department stores apparently has slowed considerably this summer, and projections for fall and winter have been revised downward in many cases. July sales by some stores in Kansas City and Denver were strong, but in Wichita, Oklahoma City, and Omaha, business was sluggish. These mixed reports contrast sharply with the uniformly exuberant responses received this spring, so that some slowing in retail trade can be inferred. Department store officials say they are not pessimistic, just reconciled to a good year instead of a great one. Several noted that sales last fall and winter were exceptionally strong, and that they are now hoping to do as well after once "wishfully thinking" that they could do better. Most store managers say that their current inventories are a little heavy, although they expect to be "clean and in good shape" by fall, implying some liquidation soon. The prices paid for merchandise by retail outlets have been holding the line, and store managers doubt if they will have to raise prices at retail very much in the next six months to a year.
Big American cars are the hottest summer item in new-car dealer lots throughout the District. Intermediate sizes are selling well, too, with compacts and subcompacts attracting the least interest. Luxury-car dealers report exceptionally good sales and complain of inadequate inventories of full-size models. The same story is heard from dealers in the lower priced domestic makes, although they note some recent up-tick in sales of compacts, perhaps due to the lack of selection in the larger models. Stripped-down versions are the exceptions, optional equipment the rule, with many of the sportier versions sold "loaded". Foreign-car dealers report little traffic, with "no shortages of cars, just customers". Domestic dealers are optimistic about the new-model year, while foreign-car dealers are hopeful.
After remaining unchanged for the month ended July 15, farm prices have turned weaker, with the declines for hogs and wheat being particularly significant. The outlook for farm prices for the rest of 1976 is clouded by uncertainties arising from the weather, total demand, and recent reports on livestock inventories. Cattle prices are currently much lower than anticipated earlier, reflecting vigorous flows of marketings from both the feedlots and the pastures. The July 1 inventory of cattle, which was down 5 percent from a year ago, points to a substantial reduction in cattle numbers for 1976 as a whole. However, the 17 percent increase in the number of cattle on feed as of July 1, with some concentration in the heavier weights, suggests that total slaughter will remain relatively large through at least the remainder of the year. This implies only modest price increases in the period ahead. Assuming a continuation of these trends, however, beef supplies in 1977 will likely be curtailed, perhaps significantly, and prices will probably rise. Larger supplies of pork and poultry would have a dampening effect, however.
Another element in the cattle picture hinges on the size of the 1976 corn crop and the cost of feed. Due to the prospects for a low carryover of grain this fall, feed prices will likely remain relatively high until a bumper crop is assured. If grain prices remain relatively high, placements of cattle in feedlots will likely taper off, which will ultimately reduce beef output and increase prices. A big crop, however, would have the opposite effect.
Among District banks contacted, business loan demand did not increase in July relative to its level in June. Several banks do report increases in loans to agribusinesses and to farmers for financing current operations and for storing grain. Most of this increase in loans is being generated by overlines from correspondent banks. Some banks also report more inquiries about real estate construction financing, although few of these have been translated into actual loans. Consumer loan growth has been moderate, with car sales being the strongest area of gain.
Most of the banks contacted have been slow to move down to the 7
percent prime rate, with some still posting a rate of
7 1/2 percent.
Despite the current weakness in the rate, the majority of bankers in
our survey expect the prime rate to rise by the year-end, although
to no more than an 8 percent level. One banker, however, predicts
that the rate will fall below the present level. Two important
factors are viewed as limiting the size of future increases: the
slow pace of economic recovery in areas other than consumer
spending, and the weak loan demand at New York City banks.