Beige Book Report: Kansas City
October 13, 1976
In light of a series of negative economic indicators, some Tenth District directors are expressing uncertainty about the strength of the recovery. Concern about inflation is also widespread, but inflationary pressures appear to be abating somewhat. The weakness in prices for District agricultural products, however, especially for cattle and wheat, has put many producers in a precarious financial position. Loan demand at savings and loan institutions for single-family houses remains strong, but business loan demand at commercial banks has shown little sign of renewed strength.
Nonbank directors surveyed expressed uncertainty over the strength of the recovery. Although the likelihood of a slump was viewed as slight, the recent collection of negative indicators has generated uneasiness in certain management groups. One respondent suggested that we might be experiencing a pre-election pause, with consumers and businessmen holding off spending until a clearer picture of the economic course that will be followed is available. Respondents generally viewed their local economies as in good shape, with most sectors up moderately. The situation in agriculture and ranching, however, was said to be very grim, with cattlefeeders losing $100 to $125 per head and some wheat farmers unwilling to sell their wheat but also unable to borrow any more money on it.
Inflation remains a major concern of several of the directors, who expect the CPI to increase from 5 to 7 percent during 1977. Price expectations reported by purchasing agents for several area companies, however, were varied. A steel warehouse and service center reported that most steel items are readily available, that it is "definitely a buyer's market," and that there have been real efforts at stimulating demand with price cuts from the mills. "Retail prices shouldn't go up significantly until something happens at our end and I just don't see anything on the horizon to change things," he noted. A lumber company reported that "prices have leveled off at a high note" and will continue there unless demand softens in the housing area. A major purchaser of paper goods identified two different markets: that for coated paper (as in brochures), which is strong, and that for uncoated paper, which is "soft." In the uncoated market, no more price increases are expected this year and an 8 percent rise is expected for 1977. Coated paper, however, may rise an additional 5 percent in 1976 and then 12 percent in 1977. Finally, a major purchaser of materials for chemical containers expects another 5 to 6 percent tacked on to its paper and steel purchases in the next few months.
District bankers are expressing deep concern over the present state of agricultural prices. The recent reduction in commodity prices, while reflecting the typical bulge in farm marketings that occurs during the fall harvest period, has put many producers in a precarious financial position. In particular, cattle and wheat producers have seen their hopes for higher prices vanish. As a result, farmers have sharply increased their requests for renewals and extensions on current obligations. Furthermore, wheat producers, who purportedly will plant as much winter wheat this year as last fall, are trying to line up financing for the new crop. Although many rural banks have good liquidity and are actively seeking other new loan accounts, there seems to be little enthusiasm for making new loans on wheat in the current economic environment. It is likely, then, that some wheat farmers will be forced to sell their grain at depressed prices to pay off loans that bankers may call. Cattle producers can be expected to continue making adjustments in herd sizes and feedlot placements. Others will no doubt try to wait for a recovery in the market, and thus will seek alternative sources of financing. The decline in wheat prices, combined with the less lenient attitude of bankers in making or extending loans, is provoking widespread support for higher government loan rates.
Tenth District commercial banks and savings and loans were surveyed on the volume and composition of their recent construction loan demand. Generally, the picture reported by the banks was not good, with multifamily construction especially weak. The one bank that did report some new multi-family demand was not lending due to the poor quality of the projects. There was also little report of renewed industrial loan activity. While some commercial borrowing for new, small shopping centers was noted, major improvement was not expected before early to mid-1977, and then mainly for commercial warehouses. Only about half the respondents expected significant improvements in multi-family construction in 1977 and little mention was made of industrial construction.
Savings and loan associations, on the other hand, reported excellent single-family loan demand and continued strong savings inflows. Conventional loan rates averaged about 9 percent with some mention of softening to 8-3/4 percent. In general, those savings and loans who made commercial loans stressed that they were very quality conscious, but that "there was not a lot of quality stuff out there." Some pickup in loans for small apartment houses and for warehouses was mentioned. One Oklahoma respondent noted that insurance companies were undercutting savings and loan rates in attempting to attract borrowers.
Most bankers contacted for the October survey indicated that loan demand had changed very little over the past month. Some reported an increase in farm loans due mainly to operating loans to farmers and ranchers who are withholding grain and cattle from the market. Several bankers expressed disappointment that the new car models had not yet increased consumer loan demand. Most of the banks contacted have lowered their prime rate to 6-3/4 percent for their national customers. Banks maintaining a local prime rate have reduced it 1/4 percent to 7-1/4 percent.